(This article appeared in Deccan Chronicle, but with a misleading heading- Alas, those are things that a writer cannot have a say in)
Real Estate Investing
Investing money is not easy. Apart from safety of the money, the other key reason to invest money is to manage inflation. Thus, if we expect inflation to be ten percent per annum, we need to earn at least that much to preserve our buying power. Every investment idea is an attempt to try and improve on that. And in every investment, one has to also worry about taxation. Taxation is takes a bite out of future buying power. Alas, inflation does not recognise taxation. It is absolute and moral, unlike the immoral taxation which penalises you. And taxation is cruel. You pay taxes and save the tax paid money, which can be again taxed for earning something on it.
In stocks one could do a SIP to overcome the pitfalls of wrong selection and/or timing. Unfortunately, we cannot do this in real estate. REIT, the yet to be born animal, promises a way out, but it is too early to comment on its liquidity and efficacy. So, in real estate, one is committed to a choice. Once you have plonked your down payment and signed the agreement, you either pay up the entire sum or risk forfeiting all or part of what you have paid.
For most Indians, if you include the house you live in; real estate is very likely to form the chunk of your assets. With our economy in a growth phase for many more years to come, it is unlikely that inflation and rentals will settle down to any predictable levels. One could perhaps take a ten percent call on inflation, but on rentals, I will hesitate to take a call. Hence, owning one home to live kind of becomes an imperative.
If we take the value of houses across time periods, most cities would have given returns in excess of inflation. Of course, it also depends on what quality of house, precise location, city etc. Variances would be huge. Of course, there were also several ‘hot’ periods in recent memory (1994, 2008-09 etc) where if you had bought a house, the returns would be perhaps lower than inflation. Similarly, in a city like Chennai, you would have got better returns if you bought in the heart of the old city as opposed to the extended city. Each city and each property is unique and there is no single measure of what appreciation the house went through.
However, it is my belief that if you compare stocks to houses, as a universe (if I take the index like the Sensex) of stocks is likely to have given a better return than the house, over long periods. Of course, one can choose specific time periods to prove either way, but as a class, I would rather bet on equities. Of course, it all depends on the extent of wealth one has and the attitude to life one has. For instance, I may be the kind of person who will buy a second home, so that the rental income becomes a pension for my non-earning years. I may also have a large portion invested in shares. Here, it is not a question of my trying to maximise returns, but of having to give in to my likes and dislikes. Everything in life cannot be measured with numbers.
Whilst measuring our success on real estate investing, we generally forget the time lapse. We like to talk about houses bought ‘long’ ago which have multiplied in value, but when it comes to shares, we say things like “in five years the stock has done nothing”. The problem is most people do not hold stocks long enough. Since it is possible to invest a few hundreds of rupees in stocks and try our hand, we give up easily. If a stock does nothing for five years, we can sell it off. However, if you bought a house and then the value falls, you cannot bring yourself to sell it. You always tend to wait for a better time to sell. Often, we forget that when we buy a house, it comes with associated costs of maintenance and upkeep. For a stock, the only thing could be a demat charges that your service provider will debit you with.
REIT s will soon be hitting the market. By investing in a REIT, you are becoming a ‘landlord’- own property, get tenants, collect rents, maintain property etc. And of course, the rental that comes your way by whatever route is taxable. So do your maths on the returns. And of course you will be promised ‘indicative’ returns on property appreciation, that should be taken with a generous pinch of salt.