In September this year,
I met Deepak and Saloni – a DINK (double income, no kids) couple – who wanted
my financial planning services. This young couple earned well, but had parked
all their investments in one asset class – property. They had a portfolio of
five houses, a term plan, a mutual funds portfolio worth a few thousands and
some shares. We started discussions 0n financial planning. By the time I visited them
again – in October – they had added one more property to their list.
I had another
interaction with a couple in their forties with a similar story – they too had parked
all their investments in property. Four, to be precise. The rest of their money
lay in their savings account.
A recent email from a
client mentioned that “I am also actively considering investing in real estate
- sometime after July next year by re-allocating funds from the MF portfolio...
as real estate tends to provide the best long term appreciation.”
We
have been taught to ‘invest in property and LIC policies, as their value never
goes down and will always fetch you positive returns’.
In
the cases I have listed above, and plenty more, property is only investment
asset class. There seems to be a craze for buying property so much so that we
tend to lose focus on all other forms of investments. This has been further
‘confirmed’ by the boom in real estate over the past 7-8 years.
Disadvantage of
investing only in property:
- · The biggest disadvantage with real estate is that it is an illiquid investment.
- · You need to spend on its maintenance and also pay taxes and duties.
- · Speculation is rampant in the real estate industry. These speculators make lump-sum purchases during a boom, without bothering about the purchasing cost and the ongoing costs such as maintenance.
Now,
I am not implying that real estate is a bad instrument for investment. But it
becomes dangerous when it is the only asset class that one invests in. Here, of
course, I should mention that the ‘first house’ (which is bought for the
purpose of residence) is not being included assuming that it is not for resale.
With
the ‘pressure’ created by real estate brokers and builders that the rates are
going up every day, lay investors fall for the trap, thinking that it is now or
never. With property prices sky-rocketing across urban and semi-urban areas,
larger chunks of money are required to fund even the down-payment. For a
salaried person, this may not always be easy.
A
number of investors fall for the “initial payment of 10 percent only” trap.
Without even calculating how they will service the balance down payment and
subsequent equated monthly instalments (EMIs), people rush in in the hope of
making a quick buck. They often sell-off the booking when the second instalment
becomes due. This is a gamble which could go seriously wrong.
With
financial planning and proper management, you can own your dream house.
A
few points that one should keep in mind before investing only in property:
- Illiquid asset: Since it is an illiquid asset, it can have serious repercussions in case there is an emergency. Lack of liquidity can lead to a distress sale. If there is a medical emergency and you require a few lakh rupees, you would have no choice but to sell off the house (which could be worth much more) to fund that immediate requirement.
- Property prices can fall: We have an innate ‘belief’ that the prices of property only go up. This is a generalised statement. It could always happen that the area / locality / city where you have purchased your property may not grow due to certain factors, beyond your control.
- Long-term returns may not be the best: Another strong notion that we carry is that property gives the best returns in the long term. Now this is true depending on your definition of ‘long-term’. If in your definition, long-term is 3-5 years, then you may be right. But it has been seen that over 25-30 year periods, equities have delivered the best returns. There are studies to prove this.
- Can affect your goals: Financial planning through property alone is like putting all your eggs in one basket. It can affect meeting your goals since there may not be a buyer when you wish to sell, at the time of your goal.
One
should have a robust, diversified and liquid portfolio, to ensure sufficient
liquidity before ‘investing’ in property.
