Many young earners are attracted towards real estate investments for various reasons–peer pressure, family expectations, desire to own such an asset, little or no understanding of real estate as an asset class, low awareness of other financial instruments and other such reasons.
Does real estate make for a sound investment for a young earner?
Let’s look at a case study. Kiran Rana is a 27-year-old IT professional from Gwalior who has recently shifted and joined a new organisation in Hyderabad. Before this, he was working in Mumbai. His father had invested in a few fixed deposits when Kiran was a minor. These FDs are now maturing and the young man’s father wants him to keep the maturity proceeds. Kiran has heard from friends and colleagues that the Hyderabad real estate market has given very good returns over the last few years. He wants to invest in real estate with the FD maturity amount and take a home loan as well. Should Kiran do so?
Before investing in immovable assets like real estate—a house, plot or commercial space—you need to look beyond the financial factors. What is the purpose of the investment? Is it just for returns or for self-use as well? How long are you going to stay in the house or the city (Hyderabad in the example above)? Do you plan to settle there? If you are not intending to stay in that city for long, it is better to avoid investing in real estate. A house should not deter you from taking up a new job opportunity. Who will manage or take care of your real estate once you move out of the city?
If we look at financial factors, remember that rental income is very low in India, especially if you invest in residential real estate, where it is just 2-2.5 per cent annually. Capital appreciation also depends on several factors. Besides that, transaction costs, which include stamp duty, registration fee, legal fee, brokerage and so on, eat up the returns in the short term. Liquidity is another big issue with real estate. You don’t have the option to make partial withdrawals from your investment. In case of emergency, you might have to sell your property below market rates. You must consider all these factors and compare them with other investment avenues that are available to you.
You also need to keep in mind your overall asset allocation and liabilities. Remember that shifting from FD to real estate is a re-allocation from debt to real estate in your investment portfolio, if the property is for investment purpose. Therefore, evaluating how much exposure you have to debt, to equity and to other asset classes relative to real estate is also extremely important to have context on how a real estate purchase will financially impact you.
The author is Founder and MD, Kairos Capital
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)