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Why is Real Estate the King of Investment?

The word has shaken Vikas Murthy out of deep sleep. Stocks, bonds, mutual funds, fixed deposits, gold and finally real estate, although the options seem endless, making a choice is a Herculean task for him. As a father with two young children in school and a career that is just starting to show positive growth, investing his savings, safely, is crucial to him.

It is true that all investment options have their pros and cons. The investment option that experts and laymen like you and Vikas can agree upon, however is the King of investments, Real Estate.

Looking for an expert opinion, Vikas turned to me. My expertise have helped thousands of people from all walks of life invest securely over the last fifteen years. In order to explain Vikas why real estate is such a runaway hit with investors, I delved deep into the nitty-gritty details of why buying property is a lucrative option.

Here is my understanding of investing in real estate.

   1.Inflation Hedging

 The relation between demand for real estate and GDP growth is the basis for the ability of real estate to foster inflation hedging. When economies grow and expand, the demand for real estate consequently increases. With the demand for real estate, the rents increase translating eventually into higher capital land prices.

Therefore despite inflation, the purchasing power of the capital investment on real estate is secure. Real estate investment looks more like a tube that will help keep Vikas Murthy’s family afloat in the sea of inflation that we all are living in.

   2.Retirement Income

 The current economy to say the least does not support saving. The pressure on the income to be spent on varied channels is high. Between school fees, fuel bills and marriage funds, almost everyone’s savings account is receiving thinner and thinner checks.

Vikas told me that several small crises have forced him to withdraw from his retirement savings account. Although he can simply choose to just fortify his retirement account, real estate offers the lure of a steady income post-employment. Real estate offers the lure of stability, of a steady income when he need not work to pay the bills.

   3.Positive Case Flow

The idea behind investing is to receive more than you have paid on a future date. This is one of the main reasons why real estate is such a good investment. Real estate is one of very investment options where you can receive a guaranteed tangible income through the year. What then is the positive cash flow?

When you subtract the annual price you will pay for a property and the income that it will generate in the same period, the difference will be your positive cash flow. Usually rental properties, such as apartments or villas that you buy as investment will generate income through rent.

Vikas lives in his ancestral home currently and the investment on real estate that he will make will be toward a rental property. The annual price that he pay will be a sum of the down payment with the monthly EMI payments that he will make to the bank. Given that rents in Bangalore have been on an upswing, he can rest assured that his cash flow will be positive.

   4.Scope of Appreciation

 Real estate investment is one of the safest investments options. The safety is owed to the scope of appreciation which is guaranteed. Numerous experts in the realm of real estate agree that over a ten year period real estate has seen the highest scale of appreciation in comparison to any other class of investment.

Land prices in Bangalore have been on a steady rise since early 2000s. Despite the slump in global economy, land prices were the fastest to recover and regain their momentum. With the scope of appreciation tagged between 20 and 30% in North Bangalore and between 15 and 20% in South Bangalore, investing in real estate will bring a guaranteed high return on investment.

   5.Tax Benefits

 Taxes are the bane of our existence. They are, however, a necessary evil, and real estate investments can give you a much needed tax breather. Real estate is one of the major contributors to the country’s GDP. Since governments are very partial to home buyers, your investment in real estate is bound to give you a tangible tax benefit as much as up to INR 1,00,000 every year.

Given the fact that VikasMuthy will have to rely on a home loan in order to gain the capital investment required to buy real estate, the taxes that he pays will be significantly lower.

A tax expert should be able to give you the finer details of just how much tax benefits you can reap from investing on real estate. The extent of the tax break you might be eligible for is largely dependent on the income bracket you fall into.

   6.Leverage

Leverage in simple terms is the ability to use borrowed capital to ensure a potential return on investment. Real estate is the only realm in investments that allows leverage. By paying only a fraction, a minimum of 20%, of the whole cost of the property, you as the owner, control the income from that property by availing a maximum of 80% of home loan.

The leverage factor is one that makes investing in real estate lucrative for you. Despite relying on leverage, the return on investment is secure and therefore is a safer bet. Even if you invest your entire savings, without leverage the value of your investment will not be very high. Leverage gives you the boost in investment without a whole lot of risk.

   7.Diversification in Investment Portfolios

 A diverse investment portfolio diminishes risk and increases returns. The benefit of adding real estate to your investment portfolio is the fact that it will carry a minimum reliance on other instruments. Assets that are not co-related to others in the same portfolio decrease risk while still fortifying the return on investment.

Investors at all stages, national and international, stand to benefit from a diverse portfolio and real estate diversifies all portfolios.

Vikas told me that half of his savings is invested in gold. Real estate investment offers the diversity to make his portfolio more secure even if gold prices were to fluctuate.

Real estate in the ways explained above and in very many other ways, truly is the King of investment. It offers a steady, reliable source of income and diminishes the risk of holding an investment portfolio. Above all else, real estate investment offers the peace of mind of having a roof over your head. Owning a home will give you emotional security and contentment that no other asset can provide. Despite all the monetary value and the appreciation talk, the emotional quotient that is fulfilled by owning a home is priceless.

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Should you buy a second house as an investment? 

Gaurang is thinking of buying a second house. He has been talking to various friends and advisers for their suggestions. Gaurang earns a good salary that includes a performance linked bonus. He has invested in a portfolio of stocks, mutual funds, deposits and bonds and is comfortably placed in terms of his financial goals. 

Hence he thinks it may be good idea to invest in a second property now. His family wants a holiday home near the hills on the outskirts of the city. His close friend thinks that he should buy a flat in the city, which can be rented out. What are the factors Gaurang should consider before deciding to buy? 

The key driving factor for Gaurang should be the purpose for which he wants to buy the second house. If the intent is to have a holiday home which the family can use as a weekend gateaway, the only returns the investment will fetch will be the occasional rent the place can earn when the family is not using it. 

Later, it might prove emotionally tough to sell a property bought and used as a family getaway. Therefore, this choice should be seen as an indulgence rather than an investment. Buying a flat in the city is a good investment idea that can generate a decent rental yield as the years go by and can serve as a good source of retirement income.  If the objective is pure investment return for the present, and he plans to buy and sell, he needs to choose the location and the property very carefully. He may be able to earn similar returns by investing in a real estate private equity fund, with lesser selection risks. Gaurang may still buy the second property as an investment and perhaps sell such a property at a later date.  He can reinvest the money in a better property when he needs it, perhaps for generating regular income post-retirement. He may be able to decide better if he defines his need better and evaluates the choice purely in terms of return and risk. 

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Dream properties is an INTERNATIONAL real estate firm, selling or renting different types of properties at a very reasonable cost. We are the only investment consultants working 24*7 to solve your property related issues.

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