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Isn't Real Estate A Safe And Profitable Bet?

If you happen to overhear conversations at the water cooler or on your walk at the park, you may often hear about the rising prices of real estate in your area. Looking around at the number of people changing cities to study or work, one imagines that the demand for rentals is also ever-increasing.  Besides, who hasn’t had an uncle or friend who has made a killing by cashing in on a house or land parcel inherited or purchased all those years ago for a throw-away price?

Like it or not, we are all influenced by this general perception that real estate deals are ‘always’ lucrative, at least in the long term! 

But before you go any further down that road, here are 5 red flags!

Returns: As a tenant, we may feel that the rent really eats into our pockets. But as an investor, rents are far from rewarding.  Did you know that presently residential properties earn only around 3 – 5 % p.a and commercial properties only about 6- 10% p.a. of market value as rent?  After adjusting these for insurance, property tax and maintenance, the net yields are barely 2-3% p.a. and 5-8% p.a respectively!  The escalations, ranging between 5-7% p.a. also offer little promise.
Unfortunately, the anticipated capital gains also don’t live up to their glamorous reputation. It is estimated that 10-year returns are now around 8-9% p.a. in the residential market and 13-15 % p.a. in commercial real estate.  Think of how much more your investment would grow in mutual funds over the same period!

Liquidity:  Anyone who has tried to purchase or sell a piece of real estate knows how cumbersome, complicated and time-consuming the process can be. As an investor, an important concern is that there can be no guarantee on finding a buyer quickly and easily when you feel the need to exit.

Emotional Attachment:  Somehow, property tends to evoke a great deal of passion and attachment, unlike paper investments. They become symbols of success and security and this often comes in the way of making quick, objective decisions.

Difficult To Monitor Value: The actual value of a property is the rate at which the deal is struck.  Anything from the floor number to the vaastu of the place, to your difficult neighbours, can influence the actual price of your property. So while the rates in your locality may be an indicator, there can be no certainty about the exact proceeds.

Protection:  Difficult or irresponsible tenants, encroachment or squatters, changes in the neighbourhood, etc. are all things that you will have to spend time, money and effort on watching. Aside from regular maintenance outlays, from time to time, surprise big-ticket expenses may become necessary to take care of repairs and upkeep as well.

Contrast all the above with Mutual Funds:

Even the safest class of mutual funds offer you comparable if not better returns, along with the welcome advantages of daily pricing, liquidity, tax-breaks and market-linked growth. You can enter and exit as smoothly, often and quickly as you like!

If you would like our help in placing your funds in wealth instruments that meet your personal requirements.

We would be happy to help you find your parking spot!

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