The Benefits Of Investing In Real Estate
When compared to investing in gold or equity, is real estate a safe bet?
To answer this question, it is important to understand what a real estate investment is. Real estate is a tangible asset. Investors choose real estate because they can touch and feel the asset, and watch it appreciate over time. It is now easier to buy real estate because many banks offer loans with a 20 per cent down payment. This allows people to buy not just their home, but also many real estate assets that rise in value over years.
The stock market is considered a benchmark according to which a country’s growth is judged. Many IT, pharma, banking, real estate, oil and manufacturing companies are listed on the stock market. The performance of the stock market is closely linked to a country’s growth. As an asset class of the stock market, the real estate index on the Sensex is an indicator of the performance of the assets of real estate developers.
Real estate and equity markets both have their pros and cons, and investment in either of them depends on the level of investment one is willing to make.
The stock market, however, requires cash in hand or liquid cash. When the market conditions are favourable, you may benefit from investing in the stock market. But when market conditions are bad, you may lose your money. This, of course, depends on the value of the stocks you have invested in.
Unlike equities, real estate prices are not published regularly. Hence, a drop in real estate prices is not openly visible. So, you do not see panic selling. Because of the illiquidity, investors also do not book profits prematurely (when prices rise) as in the case of equities.
Real estate is the best asset class to invest in. If you want to lose money, real estate is a great asset class to lose your money in. These statements are contradictory, but true. In the end, real estate investment means different things for different investors, and has significant advantages and disadvantages at the same time.
What are the benefits of investing in real estate?
- By investing in many properties, you can build an asset bank and raise your net worth
- Real estate investment is often seen as a tool to hedge volatile investments in the stock market
- The benefit of investing in real estate is that it offers an opportunity to earn rental income
- Rental rates rise whenever a lease term expires, and is renewed
- In addition to profiting from renting out your properties, you are also benefiting from its gradual rise in value
- Real estate is also an extremely tax-efficient investment. Depreciation of your assets can cancel out some or all of your profits, allowing you collect rental income at a favorable tax rate.
- Real estate is a long-term investment, because people hold on to it for a while. Selling real estate is time consuming.
- An investor or a buyer has much higher control over the performance of a real estate investment than other types of investments. For example, a buyer can do things to a property to increase its value.
- Real estate returns do not have a high correlation with the performance of other asset classes (such as stocks and bonds). This leads to greater diversification in the buyer’s investment decision.
Mistakes to avoid
After you have made up your mind to invest in real estate, it is better to avoid buying or investing in under-construction flats. The buyer is actually lending money to a developer hoping that he will deliver a flat in the not-so-distant future. A buyer makes a good return when they buy an under-construction flat. But high returns imply greater risks. In the Indian context, the risks of buying an under-construction flat are so high that real estate developers have to lower prices enough to give the buyer good returns.
As long as you understand the risks involved in it, there is nothing wrong in buying under construction flats for higher returns. But most people don’t understand the risks well.
Everybody should invest in real estate. Do not delay buying your own home. Understand what you are getting into when you buy an under-construction flat.