Is real estate a good investment

 Is it good to invest in real estate...

Purchasing a real estate for investment is little tricky decision. On an average for a long term, real estate usually may not be a great asset. Return will usually match around Inflation. 

Reasons not to buy real estate

1. It is big investment to begin with: While other financial investments like stocks, FD can be invested with as little Rs 500, Real estate runs into multiple lacks Rs of investment minimum. This can also be the biggest investment, an investor does in his life time. So that is a high bar to enter into a real estate transaction.

2. It is not liquid enough: Selling a real estate can take multiple months compared to FD or stocks which can be done very quickly in matter of days. Real estate selling can easily take 3 months but at times even 6-8 months. 

3. Price is not very objective: Price is very subjective in nature and people can quote different rate for similar property. So, there is a hard task of discovering the price of real estate. An apartment can be quoted for 1 cr while in the same building, a similar apartment might be quoted for 80L. It will depend on the floor, layout, view the apartment has, interiors, need for seller to sell and so many things that it is difficult to come up with a strict formulae or pricing for real estate.

4. Emotional attachment: While all investments are done with keeping money in mind, lot of families get into emotionally attached with the real estate specially if it is their first transaction or their house that they lived in. This prevents them for making rational financial decisions. This includes not selling, holding on the property, asking for high price etc. 

5. Risks before Possession: Too many moving threads are there with buying a real estate like quality of your apartment, leaks in plumbing, electricity, timely construction etc. 

6. High Transaction Cost: A real estate transaction both from buying side as well as selling side can be expensive in terms of transaction cost. This includes Agents fees which can be as high as 3% of the transaction value, registration cost which can be 5-15% depending on the location, and other charges like Lawyer fees for creation and verification of the papers like EC and agreement of sale etc. All in all, this cost can be close to 10% of the transaction

7. Chances of litigation: Real estate transaction along with pure Check based transactions are 2 of the most financial transaction where lot of litigation can happen. Typically, a real estate might be owned by multiple people or their can be inheritance issue where children of the owners can fight amongst themselves on who gets the real estate, sometimes, the govt can acquire the land leading to owner filing a case in court. Also there can be fraud involved, people doing encroachment of open land. So, this type of investment is one of them most prone to litigations. 

8. Return on Apartment typically decreases over time: As an apartment/building gets old, the price rise of the same typically is lesser then the newer apartment in the vicinity. This usually happens due to lower maintenance of the old apartment, look n feel of the apartment getting old, newer apartments having better facility, more of the need of the hour facilities and construction quality. 

There are advantages of real estate as well

1. Long term safety: If you buy an apartment or house, you will enjoy the living in the apartment while the pricing appreciates. Also. given the high cost of the transaction, one typically lives a long time in the place giving long term automatic investment safety. Money is also locked as in buying/selling is bit more cumbersome then say opening/closign of FD or buying/selling stocks/MFs so chances are that your money is locked for some time which allows for disciplined based approach. 

2. Rental Value: While the only way for most assets to make profit is to appreciate, real estate gives "rents" as additional way to make money. Typically for residential usage, you can expect 3-4% of the rent while for commercial properties more like 7-8% of the market price, annual rent you can expect. 

3.  Land prices usually go up: Historically, the land price will typically go up over a long period of time. Exceptions do exist where price see a downward revision but, in most cases, prices go up. Only thing is prices can stagnate for long period of time and the rate of appreciation might not be more than inflation so typically 5-7% appreciation over a long run. In short run (1-5 yrs), prices may double or even go down though..