Investing in Real Estate has its Pros and Cons.
Situations like the COVID-19 lockdowns often lead to a negative mindset as the markets hit their nadir. It is essential to understand that this is just a minor letdown and a temporary phase. There are many good reasons to invest in Indian real estate. The only drawback to investing in real estate is its limited liquidity; you cannot convert your investment into liquid cash when you want. Also, waiting for the market to rise can be frustrating after a slump that lasts for years!
However, the good news is that there are many plus points and many methods by which you can eliminate your concerns while investing in real estate. Here are some important aspects that you should keep in mind.
Real Estate is Tangible Wealth.
Investments like bonds, stocks, fixed deposits, mutual funds, etc, are all abstract, while real estate is a tangible asset. Unlike bitcoins or stocks, which exist only in the imagination, real estate is “real”.
What does this convey?
Imagine a stock market crash. Where does that leave you? The market value of stocks can become zero. Your real estate will always be something of value. Paper money, or money in stocks, can disappear one day, while the real estate asset will always have value.
Using Real Estate to Generate Wealth
Even when the market is low, you can convert your assets into productive space by renting them out, producing goods and services, storage, busy houses, etc. Many indirect real estate investments can give you stable returns even in a volatile market.
A limited supply of property
In India, there will always be a shortage of quality accommodation. As its population grows, the demand for livable, secure places can never decrease.
Just give it a thought – While companies can raise more shares or bonds, can anyone create real estate overnight? There is only a limited amount of land. Thus, there will always be a steady demand for real estate properties.
Investing in real estate offers Increased control over your investment
By investing in real estate you can control what you want to do with your property. For example, if you increase its value by doing up its interiors or exteriors you will enhance your income and get you financially sound tenants.
Importance of Diversifying your Portfolio while Investing in Real Estate
Diversification is vital to wealth creation. Therefore, try to combine different types of investments to minimise your risks. Your portfolio should include varied investments that smooth out the vicissitudes of the markets and increase your cash flow and earning potential over time. Thus, when an asset goes down, the others balance out and keep your portfolio on solid ground.
Understanding the Correlation Factor
Real estate has a low correlation to other types of investments.
Including real estate in your portfolio helps to balance the financial world’s volatility. Even if the value of your other assets declines over time, your real estate investments are stable or increase in value. Similarly, when other assets increase in value, real estate rises a few notches at a time. As a result, the highs aren’t as dramatic, and the lows aren’t as terrible!
Investing in Real Estate Offers a Cushion against Inflation
Consider this: in 1980, the monthly rental for a 2 BHK apartment in Mumbai was probably somewhere between Rs. 500 and Rs. 1000 per month, depending on the location. Ten years later, it rose five times, to Rs. 5000 per month. By 2020, it had nearly reached Rs. 50,000, a tenfold increase!
Inflation is a reality in which you pay more money for the same thing. While this may be bad for tenants, it shields landlords from the effects of inflation. At the same time, the selling price of the property also rises!
Appreciation in value of your Property
The value of real estate generally appreciates over time. Therefore, real estate is an ideal panacea against inflation. In India, residential real estate has grown at a rate of about 2.5 % per year. Prices in tier 2 cities such as Pune, Nashik, Indore, Kochi, Surat, and others have risen at a much faster rate. The “rent escalation” clause in lease agreements accounts for inflation in your property’s rentals.
Rental income from real estate assets is consistent and reliable. Real estate assets are productive and bring in regular cash as rentals. They also gain value over time through market appreciation. Thus, real estate assets are less volatile and offer steady returns with reduced risk.
Investing in real estate offers certain tax advantages that help you retain more of your earnings, giving you the double benefit of increasing your savings and having a higher net worth in income-producing assets.