Don’t place all your eggs in the ‘property’ basket

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. 

People should carefully plan their investments to meet their goals in an organised and structured manner with due importance to asset allocation. Putting all the eggs in to one basket  could lead to severe consequences.