This post has been written by Nishanth Muralidhar, a Safal Niveshak tribesman.
One of the great enduring myths of the Indian middle class is that an investment in real estate can never go wrong, and that buying or constructing a house is the best investment that you can make.
I believe Vishal himself wrote a post on Safal Niveshak stating that his house was the best investment for him.
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Well, we are here to see if that statement holds true regardless of age, life situation, and individual circumstances for all investors. But first…
What is an investment?
If you were to avoid Ben Graham’s definition for some time, in simple words, an investment is something where we deploy our money, time and effort into, so that it can generate a reasonable amount of return or create wealth in a reasonable time period.
By that yardstick, your education is an investment, the fee you pay for a certification which helps you to get a better job is an investment, and the subscription you pay to a stock newsletter can also be an “investment”.
However for all investments, there is one common factor which determines the future returns you derive from it. That factor is the “price” you pay for the investment.
I believe no long-time reader of Safal Niveshak will say that we can buy an “investment” at any price and expect it to be successful.
This brings us to the main point of this article – Is real estate really your best investment?
Real estate is the perennial favourite of the Indian investor. But is buying a house at ANY price a wise investment?
A house is an essential need for an individual, not an investment, exactly like insurance. But the guise for the vast majority is that it is an “investment”.
Do they plan to sell the house after 10 years? No. Do they intend to run a reverse mortgage on the house? No. Then how exactly will this house be an investment?
Clothing, food, and shelter are the basic needs of any individual, so buying a house or flat as primary residence makes sense.
However, buying at any price due to the fallacy that “real estate prices never go down” does not make sense. But, look around you, and that’s exactly what is going on!
People are willing to throw money at any substandard flat, in any remote location, without proper roads, electricity or water supply, but just because ‘real estate is safe’.
They are also willing to take loans at inflated prices from banks and willing to spend 10-15 years of their lives as corporate wage slaves. And they call this an investment!
If one is sure that he/she will live in a city for a period of 5-10 years or intends to settle down in that place – for work and/or retirement – then yes, it stands to reason to buy a house or a flat.
Otherwise, a house property acts as a shackle to the individual, forcing him to curtail his career moves and flexibility.
Another argument is that buying a house acts as a forced saving. Well, I can buy this argument if this is for a house for residential purposes. But if it is for investment purposes, it might be better if the money were invested via a SIP in a well-managed mutual fund for 10-15 years.
Case for real estate investment
We can distill the case for real estate investment as follows.
If you need a house to live in, you are reasonably certain about the city you want to live in, and your career, plus you can muster up at least 30-40% of the price as down-payment, please go ahead and buy.
Else, rent and invest the surplus in a well-managed mutual fund on an SIP basis.
And please, don’t create arguments like, “…the rent will be equal to the EMI in any case.”
I have rarely heard of anyone paying rent of Rs 40,000 per month for a rental apartment for reasonable living accommodation (I’m talking about an average Indian middle class here). Especially if you are not sure, please invest your surplus in both equity and debt, based on your asset allocation.
Still, if there exists a need for residential property as an investment, then make sure that your income from other sources (salary, dividends, interest income) exceeds any potential EMI payments that you might need to make.
To conclude, real estate is a great investment…but it is not a great investment at all times and at any price.
“Buyer beware” must be your motto, dear tribesman.
About Nishanth: Nishanth is a middle-class 30-year old IT software engineer, hailing from Kerala and currently residing in the US. He has been investing in the Indian stock market for eight years now and is a keen follower of value investing.