In this post we are not comparing Real Estate Vs Equity that which is better but here we are explaining it is important to have exposure to both real estate and stock market investments. Both real estate and stock market investments can play significant roles in a investment portfolio.
In equity, you can analyze the historical technical charts of individual stocks or indices to check returns. However, it is tough to analyze the returns of a small area in real estate because real estate data is not readily available, and sometimes there is also a cash component involved due to which you cannot know actual selling and buying price because only white part is shown in registry data. That’s why you hear stories about stocks but not about real estate in newspapers. You can hear real estate appreciation stories from your relatives or closed ones, but they are not featured in the news, and they are relatively less prominent than equity. In the equity market, too many stakeholders are involved, such as the government, banks, mutual funds, industry experts, corporate owners, and their employees that’s why stakes are high in real estate. Due to involvement of too many stakeholders, Mutual funds and stocks are promoted everywhere like everyone want that price of stocks and NIFTY Index should be high as NIFTY is barometer of Economy. However, if you are buying a small plot or flat, only the seller or builder’s stakes are involved. That’s why equity is promoted more while real estate is not promoted as much.
In equity, the probability of profit is very less in individual stocks and you ended up even less than FD returns like 90% people doing trading or investing in stocks for less duration ended up less than FD returns, but it is not the case in real estate. In real estate 95% of people who invest in property, beat FD returns but reason why people afraid in investing in real estate is because a large amount is invested, and if it goes wrong, all the earnings of one’s life are at stake and suffering is much higher in real estate. That’s why people are afraid to invest in real estate. On the other hand, in stocks, you invest a small amount of your savings, and it is also diversified among different stocks, so if one stock incurs losses, your capital does not get wiped out. But the truth is that even if you invest a small amount in equity and get exceptionally good returns, it doesn’t make a significant difference in your overall net worth or wealth because a large portion of your capital is invested in savings, fixed deposits, or real estate. Financial influencers or mutual fund guy believe in formula-based returns, such as investing Rs.15,000 per month for 15 years at a 15% return, which would amount to Rs.1 Crore, and then you can use that Rs. 1 Cr to buy a house. But equity guys don’t consider inflation, and they don’t tell you that after 15 years, if property appreciation is considered at 11%, including 8% inflation, the value of the property will be 5 crores after 15 years. If you ask any mutual fund guy about real estate they will simply tell you that if you buy a property of 1.2 Cr and if you take Rs.1 Cr loan and Rs.20 lakhs from your own then you have to pay 1 Cr extra for a loan of 20 years so total amount you have to pay Rs.2.2Cr. They will tell you that rental yield is 3% and home loan interest is 9% so rental yield is far less than EMI but they never tell you that interest rates are decreasing as it was 10.5% in 2012 and now it is 8% and it may decrease further as we are following economy of developed countries so it can be 6% after 10 years. Financial influencers never tell you that your rent will be double after each 7-8 years considering 8% inflation and rent will be four times of current rental after 20 years. After 20 years when EMI will not be there you will get 25-30% yearly returns on your capital invested. They will never tell you about the income tax benefit that you will get per month. They will never tell you that your property will also get appreciated each year at least 7% due to inflation. They will never tell you that when you buy under construction property, your own savings is not going at one go but it will go slowly in 4-5 years. they will not tell you that you can prepay loan also before 20 years as your salary will also double in 8-9 years. They will not tell you tell in future flat size will be smaller and if today you are getting 2bhk in 1200 sqft but after 7-8 years you will get smaller 2bhk like 990sqft at inflated price. They will not tell you that loan amount of 1 Cr in current times will be like Rs.20 lakhs loan amount after 20 years due to inflation.
The biggest drawback in equity, whether in mutual funds or individual stocks, is that you cannot use leverage for investing. However, you can use leverage in the Future and Options market and in Intraday trading, but there your capital can get wiped out very easily.
If you have Rs.10 lakhs today, you can use leverage to buy an under-construction flat worth 1 crore, depending on your loan eligibility and your returns will be on Rs.1 Cr. But in equity, if you have Rs.10 lakhs you can only invest 10 lakhs and your return will be on Rs.10 lakhs only. If you have taken a loan of Rs.80 lakhs and assuming an 8% inflation, the value of the loan decreases gradually year after year due to inflation. In an under-construction flat, your savings amount is released in 4 years, so you get leverage of 90-95% instead of 80%. With more leverage, the returns on your invested capital increase. If the price of your Rs.1 crore flat increases by 10% each year, you have only invested 5 lakhs, but the appreciation will be on the Rs.1 crore.
When you have your own home, you get peace of mind. A home is like insurance for your family. If you have a home, your social status will increase, as if you have cleared one level up in the game of life. You cannot show everyone your mutual funds portfolio.
If you want to invest in both equity and real estate, one way is to take a loan for real estate and buy cash flow properties. For example, if you take a flat on a loan, initially the EMI is higher than the rent, but after 5-7 years, when the rent of your property becomes higher than the EMI, you can invest the difference between rent and EMI as a monthly SIP. The benefits are that you will get capital appreciation on your property, and its value will increase. Second, your yearly rents will be invested in mutual funds, which will also appreciate. Third, yearly rents will increase, so your SIP in mutual funds will also increase, let’s say by 8-10% each year.
If you don’t want to invest in SIP and want to invest when valuations of stocks are low one more strategy is to invest the monthly rents in recurring deposits(RDs). Whenever there is a mini or major crash in the Stock market (in general, a major crash occurs every 8-10 years, and minor crashes happen every 3-4 years), you can break those monthly RDs and invest the amount in index funds or mutual funds. This way, they get equity at very good valuations, and their risk-reward ratio remains excellent.
