Real Estate – Why it is a bad investment?

Real estate is a prime investment option for most of the people in Andhra Pradesh and Telangana. We think that it is a good investment. But that is not true. Real estate is a bad investment option.

We think will give more return(profit) than anything else.

There are few reasons why it is not worth investment.

Below are a few reasons explained…

Real estate investment needs a loan to purchase…

Real estate investment demands a lump sum amount at the time of purchase, which many of us do not have.

As a result of this, we tend to take heavy loans to purchase peace of land or a house, even if we cannot afford to buy it.

This process of buying land or a house with a loan, thinking that the return from the land or house will be more than the interest paid on the loan, is called leveraging.

But this kind of leverage is dangerous to do. I have written an article regarding this. Click here to read.

Investment means it has to give more return than inflation. But if you take a loan to buy a house or land, then if you take interest percentage from profit percentage of the real estate,.

In most cases, you will get losses and sometimes a much lower return than inflation.

So, it takes years to pay off the loan, and we get more return after clearing our loan only. That means a lot of time is wasted in creating wealth because of this leveraging in real estate.

Residence property should not be considered “real estate property.””. It is just a commodity like gold that we use daily.

In addition to the above sentence, you should buy a house that you can afford only.

Read this article about owning a house that you can afford to buy. Click here to read.

We can create wealth installments with the help of Financial Assets like shares, mutual funds, fixed income, etc.

But it is not possible with real estate. As it demands lump sum investment upfront at the time of purchase.

I made another video also on the profitability percentage on house or land.

To analyze the housing prices, I took the data from National Housing Bank website.

Real estate investment disturbs your asset allocation to other financial goals…

As I said, a house must be bought for a residing purpose only. But I have seen most of the people buying second houses or land for investment purposes.

These people are not able to understand the importance of accumulating corpus for other goals like retirement, child higher education, and child marriage expenses, etc.

I have seen people investing in the second house falling shortfall of their retirement corpus and child higher education, etc.

The reason for this is that they do not know “time value of money” and its impact in life.

Do read some articles in my blog about the time value of money. Click here to read.

Real Estate Real Valuation not known…

Real estate real valuation is not known. There is not a proper mechanism in place to know its real value.

We tend to give speculative value to our house or land. But at the time of selling it we tend to get a much lower amount than the value we used to speculate earlier.

But it is not the case in financial assets. For example, if you own an HDFC share, you are in a position to know its real value daily.

Real estate is not a liquid asset class…

When I need to sell it, it is not easy to liquidate. But in the case of financial assets, I can liquidate immediately whenever I need money.

I am not saying you cannot sell it. But it takes a lot of time to sell.

You need to bargain so much while selling. But in financial assets, bargaining is not required.

So, finding the right buyer at the right time is very difficult.

So, the lack of liquidity also makes real estate investment a bad investment.

Real estate does not have enough liquidity after selling also…

We generally do not want to pay any taxes. Real estate investment also attacks some tax when we sell it.

According to the present capital gain rules on real estate investment, There will be a long-term capital gain tax if the holding period is more than 2 years.

If the holding period is less than 2 years, then short-term capital gain is applicable.

You have to invest your sale proceeds in 54 EC bonds in order to prevent yourself from paying long-term capital gains.

The lock-in period in these bonds earlier was 3 years. But now it is 5 years.

As a result of this, your real estate investment is not liquid even when you sell it.

Real estate investment has possession risk…

One of my uncles, who retired 6 years ago, bought an apartment at his retirement.

The construction is not completed till now, and the possession is not yet completed.

My uncle is also not able to fight legally. As it is not easy to fight against the builder.

Apartments generally have a life of 30 years only. My uncle already lost 6 productive years, and he lost the opportunity of renting the apartment.

The suspense is not over, and he is yet to receive possession of the apartment.

His hard-earned money of 30 lackh seems completely ruined in this apartment purchase.

The regulation is not supporting us in a great deal.

So, possession-wise also, there are a lot of difficulties in real estate investment.

Rental income from real estate is not enough…

Do you know why Ambani, Tata, and Birla are doing businesses instead of buying lands and houses?

The reason they are doing businesses is to earn a return over and above inflation.

Ambani & Co. will not buy real estate for doing business. They will take buildings for lease and will run businesses.

People tend to buy land and houses in order to get profit. But profit percentage must be over and above inflation.

People argue with me they can rent the house purchased. They say the rental income will cancel out the E.M.I. and they will get profit when they sell the house.

But the majority of times E.M.I. will be more than the rent received.

The rental yield is 3% to 5% only.

We can calculate rental yield with the help of the below formula.

Rental yield = Annual Rent received/cost of property- minus expenses per year (taxes, etc)

An investment like bank fixed deposits, liquid funds, and arbitrage funds will return more than the rental yield from real estate without any effort.

Here, we should consider the depreciation of property. The structure will depreciate at least 4% every year.

That means a structure or building has zero (excluding land) value after some years.

So, renting or buying real estate is also a bad investment.

Real estate investment has emotional tendencies…

I had a discussion with one of my family friends recently. He is planning for marriage for his sister.

The expenses needed are around 20 lacks.

He is planning to take a personal loan at 15% interest for a tenure of 6 years.

He has I.I.T. as a qualification. But he is not in a position to do simple math.

He should take a personal loan if he is sure that his family”s existing land will give more than 15% interest that he has to pay.

Real estate profit percentage in his city over the last five years is just 8%. Coming years, not sure how much return it will give.

He argues that his family members cannot face their relatives if they sell the existing land.

He says it is a shameful thing for them.

God must save him; he may end up losing 20 lack to 30 lack or even more in this decision.

We sell our financial assets easily. As others do not know their existence.

But when it comes to physical assets like gold and real estate, we are not ready to sell them.

This kind of emotional attachment towards real estate property also makes real estate a bad investment.

Real estate is overvalued in India…

When we go to the vegetable market, we try to buy a cheap vegetable. We avoid costly vegetables.

Real estate in India was overvalued because of black money. But in the case of real estate, we are not following the vegetable shopping rule, which I have explained above.

People search for answers that they like. But it is not good for them.

There are other opportunities available to do asset allocation and to create wealth.

People should know their risk tolerance and financial situation.

Then they have to start investing in financial assets, keeping their financial goals in mind.

This entire process can be done on its own by increasing knowledge about investment planning and goal-oriented investment.

If they feel that they do not have that much ability to plan all these. Professional and Qualified Sebi Registered Investment Advisers will help them in “financial planning.”.

Read an article about Sebi Registered Investment Adviser—How he helps in creating wealth. To read, click here.

Read an article about Chit Fund Profit Percentage also. Click here to read.

If you are a state government employee, then read this article about the APGL/TSGL interest rate. Click here to read.

Read the article about Xirr calculation in real estate, shares, mutual funds, etc. Click here to read.

Also read an article about the usage of the time value of money in your daily life.

Read an article about buying a house with a loan—is it good?

and read How to pay low interest on your home loan.

In addition, read different types of loans in India.