Ketki Jadhav
Aug 19, 2022
Listen to 8 Reasons Why Real Estate Might Not be a Good Investment for You
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The main objective behind any investment is to create wealth. However, the purpose of creating wealth may differ from person to person, one might want to build a retirement fund, and the other might want to generate enough funds for their child's education. But in the end, we all aim to generate maximum returns on our investments based on our risk appetite. There are numerous options one can choose to invest in, such as equity mutual funds, fixed deposits, real estate, gold, etc. Out of which, real estate is one of the oldest asset classes.
Owning a house or commercial property may have several benefits, such as long-term property appreciation, no monthly rent, peace of mind, lifetime memories, and many more. For many individuals, owning their own home is the biggest dream of their life. However, if you are considering real estate as an investment option, you need to think about it in detail. It is fascinating to hear about our old relatives bragging about how their real estate investment decision turned profitable as they invested Rs 20 lakhs and the current property value has become Rs 1 cr. But do we consider the time horizon here? If you calculate the real returns considering the investment horizon and other factors, the returns could be average or even less than that.
This article enumerates 8 reasons why real estate might not be a good investment for you:
1. Requires Huge Investment:
We all are aware of the fact that real estate investment is one of our biggest investments. The property purchases involve high transaction costs, such as stamp duty and registration charges, brokerage, parking space fee, interior, service tax, preferential locality charge, etc. The middle class cannot afford to buy a decent property in an urban area without financial help from a bank or NBFC. The interest, processing fees, and other fees and charges on such loans further add to the cost of the property. Whereas one can start investing in mutual funds with a capital as low as Rs 5,000 in a lump sum or Rs 500 on a monthly basis.
2. Unpredictable Asset Class:
The high returns earned on real estate investments are mainly because of sheer luck or extensive research in the field. The property prices significantly increase when there is an announcement of a construction of an airport, shopping mall, etc. facilities. Doing the best quality construction, using highly skilled labour, etc. only has little to no influence on the change in the prices of the property. However, the external factors largely influence the prices, which makes real estate an unpredictable asset class. So, you can make a smart move if you have prior information about the projects that will increase the real estate prices in the locality. That said, such projects can get cancelled and you may end up investing a high amount in a property that does not earn any returns.
3. No Liquidity:
The liquidity of an investment is its ability to convert it into cash if the need arises. For example, if you invest in gold, you can sell your investments during an emergency to take care of unexpected expenses. Similarly, you can redeem your open-ended mutual fund investments anytime by paying the exit load, if any. However, a real asset can face many liquidity challenges. It can be difficult to find a buyer if it is a buyer's market. Furthermore, even if you find the buyer, they should be ready to pay you the expected price during times of need. Besides, you cannot divide the investment or liquidate a part of it if you only need a part of your investment, which is possible in the case of most other investment options.
4. Low Returns:
As discussed earlier, with a few exceptions, most properties generate average or below average returns in the long term that are similar to fixed income instruments like fixed deposits, which is a low-risk investment avenue. Real estate investment can barely beat inflation. Even if you rent out your property, you mostly earn less than what fixed-income financial instruments offer.
5. No Diversification:
While investing across different asset classes is crucial for portfolio diversification, each asset class allows you to further diversify your investment. For example, when you invest in mutual funds, you diversify your portfolio by investing in different types of mutual funds based on your investment objectives and risk appetite. Similarly, when you invest in fixed deposits, you can diversify them by investing in different banks and other financial institutions. However, since real estate requires large capital, it might not be possible for a middle-class person to invest in multiple properties. Furthermore, even if you have invested in different properties at different locations to diversify the investment, it is difficult to manage the properties at different locations.
6. Unorganised Sector:
Although the government has started taking efforts to organise the real estate sector, especially with the Real Estate Regulatory Authority (RERA) for under-construction properties, the sector is still unorganised and unregulated. If you see other investment avenues, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), and banking products like fixed deposits and recurring deposits are regulated by the Reserve Bank of India.
7. High Possibility to Outgrow the Property:
With changes in the life stages, our family's needs and requirements change. The house that seems like a dream house, may not be suitable for your family after a few years. There could be several reasons you outgrow the house, such as the house that you buy today might not be sufficient after having children or after their marriage, you might wish to have a bigger house or a different location with the advancements in your career, you might want to live a peaceful life outside the city post-retirement, or your children may need to move to a different location for studies or work, and many more.
8. High Maintenance Asset:
Even after buying the property, you have to pay property tax, society maintenance, pay for repairs, etc. Moreover, if you have rented your property, there are chances of damage to the property, which is an added cost to you. All these expenses do not make real estate a good investment option.
To Conclude...
Buying a house or any other property is an emotional investment and a feel-good factor for most people. However, before investing in real estate, you must understand that it is not an attractive investment option. In fact, it is a high-risk and low-return investment avenue that is not suitable for most of us.
Warm Regards,
Ketki Jadhav
Content Writer
