Obsession with buying house: Why do Indians prefer real estate?
Real estate is a capital guzzler
Gaurav Mashruwala, founder, Gauravmashruwala.com
Real estate is a capital guzzler, illiquid, immovable and indivisible. Also, it is cumbersome to acquire, maintain, liquidate and bequeath.
Capital guzzler: Many times, a single piece of real estate will constitute almost 70-80% of the client’s portfolio. If that is the case then it is a no-brainer that real estate shouldn’t be considered.
Illiquid: It is not very convenient to liquidate real estate and hence even if real estate is recommended from the investment perspective, the planner has to be careful that the client has substantial liquidity/liquid assets to meet other financial goals and contingency.
Immovable: Irrespective of what the client feels, unless s/he ensures personal upkeep and maintenance of real estate, it is not recommended. In the beginning, there is enthusiasm but over the years, small issues like paying property tax, water leakage in house, pigeon nest and so on can damage real estate. Therefore, invest only if there is time and accessibility.
Indivisible: In times of need, it is not possible to simply sell off a portion of real estate.
Besides, bequeathing of real estate and later ensuring that titles are appropriately transferred is a cumbersome process.
■ One bad deal can drag the entire portfolio
Raghvendra Nath, MD, Ladderup Wealth management
Most people fancy buying real estate as it is a real asset and not just a paper. Also, they believe in the long term, most real estate prices would appreciate; so the chances of loss are negligible. In India, buying a home is one of the top priorities for people. The outlook for the real estate sector continues to be quite pessimistic especially for the next 4-5 years. The demand is negligible, the price levels are still elevated resulting in tepid end-user demand. Most builders are in financial stress with large unsold inventories. In such a scenario, investing in real estate could be a high-risk proposition.
For most investors who have moderate levels of wealth, let’s say less than ₹10 crore, the only real estate that we recommend is their residential home. For rich investors, the recommendation is to keep only 30-35% in real estate assets. Because, if you have limited wealth, you need to have liquid investments so that you can utilize your wealth when you need it. Also, real estate investments are done in chunks and one bad investment can permanently drag the returns of the entire portfolio.
■ Most investors fail to calculate effective return
Rohit Shah, founder and CEO, GettingYouRich
Real estate attracts a large set of clients as it is something they can touch and feel, for real, unlike a financial asset. Most investors fail to calculate the effective return (CAGR) from property investments and often incorrectly get impressed with an abnormal looking return. Investing in a second home for rental income continues to be one of the most popular retirement plans in India. Lifestyle aspirations are a one-way traffic, so many clients keep looking for bigger and better houses. But how many have gotten into the Forbes list by investing in two-bedroom flats?
A portfolio should consist of a group of assets in such a manner that the overall returns are insulated with non-correlated movements across the assets. Balancing between physical and financial assets would be a prudent measure. The objective is not to maximise but to optimise the returns. Basic principles like need versus wants and delayed gratification should be kept in mind. The financial plan would need to be re-calibrated post a massive investment and could throw goals behind schedule.
■ Not realistic to go for a home very early in the career
Suresh Sadagopan, founder, Ladder7 Financial advisories
Real estate is an emotional purchase item. Most people want to stay in their own homes, even if it is small. They feel a sense of security living in their own home. There is also a huge pressure from family members to procure a home. Societal mores also are pro-home ownership.
We support the idea of buying a home for living purposes. The problem we encounter is about the amount of money to be spent, the timing of purchase and about ensuring that the property purchase does not impact other important goals like retirement, children’s education etc.
Homes are expensive today. It is hence not realistic for someone to go for a home very early in their careers. One needs to pay about 25% as down payment and that money should be available. Second, while taking loan remember that it is a long-term commitment. The EMI also would be significant and it’s serviceability should be established. When the loan servicing depends on the income coming from both the husband and wife, the flexibility of one dropping out for raising a child is lost.
People are mobile today and move wherever their job takes them. Hence, they need to be clear that they intend to continue working in that city from then on and not move around. Else, one may buy a property in one city and move to another city based on career needs. One will then pay EMI on own property and also pay rent in the new city.