Real Estate Is No Substitute For Equity – Business Line – 15-Dec-2014
December 24, 2014 - Uncategorized
Many of you are comfortable investing in real estate than in equity. Whether or not your parents and grandparents invested in shares, they certainly bought land and houses, and perhaps, profited from the investment as well. Besides, you may have observed your friends and neighbours getting rich by selling off their bits of land.
This article is not about whether real estate or equity investment is better. Rather, it is about why real estate cannot be considered a substitute for equity investments.
Real estate vs equity
For the purposes of this discussion, we define real estate investment as any investment in land and buildings, including residential apartments with the objective of earning returns.
This means your self-occupied house will not be considered an investment.
You should not substitute investments in equity vis-a-vis real estate for the following reasons. One, you may decide to move from one city to another or from one country to another in search of a better career. Your portfolio investments should be portable, in line with your employment.
If you buy real estate in the city where you currently live and later decide to move out of the country, how can you protect your property from predators? Equity, on the other hand, is a financial asset and, hence, easily portable.
Besides, you do not have to incur high costs for maintaining your equity investment.
Two, real estate is a lumpy investment. You require a substantial amount of money even towards down payment to buy a house or land. Besides, real estate is illiquid. Therefore, your real estate investment could be risky if it constitutes 40-50 per cent of your total investment portfolio.
Equity, on the other hand, requires smaller investment outlay; you can buy one share of a stock or invest just ₹500 every month in a systematic plan of a mutual fund.
Besides, equity investment is more liquid than real estate; so, you can sell your investments to meet any emergency.
Three, an investment should preferably offer two sources of returns — income returns and capital appreciation. If you invest in equity, you receive dividends and capital appreciation.
That is not necessarily true with real estate, where your only source of return is capital appreciation.
Or, take an apartment or a house. You could generate rental income but can you necessarily expect capital appreciation? Real estate is a physical asset.
And physical assets undergo wear and tear. So, your apartment value could reduce over the years.
You could get a higher price if new apartment values increase.
But it is moot if you will always get a higher price than your initial investment. And even if you do, which has a higher probability — selling your apartment or equity investments for handsome capital appreciation?
Good for retirement
Real estate should certainly have a place in your investment portfolio, but not as a substitute for equity investments.
Real estate is more useful when you retire; your investment on that can generate pension because rental income is a fixed monthly cash flow.
Besides, rentals are partially inflation-adjusted as you can increase your rentals in line with the general price levels. You can reverse mortgage your house to raise money for your retirement if needed.
Consider real estate investment in your early working life only if you have large surplus cash after savings to meet your priority goals.