ARE REAL ESTATE INVESTMENTS A GOOD IDEA?
It may not be wise to invest in real estate given that liquidity could be a concern. It is understandable to consider acquiring something for oneself without having any possessions. However, the process of selling a property can be lengthy and may not always guarantee a good buyer, so investing in real estate may not be the best idea.
The real estate investor may struggle to keep up with the rising costs of property taxes, maintenance, insurance, etc. This can reduce the overall value of the investment and make it difficult to make a profit. To offset these costs, rental/lease payments may be necessary. Finding tenants to pay these expenses can be difficult, especially in highly sought-after real estate markets such as Mumbai, Dubai, etc.
Suppose a recession is predicted to occur in 2023, leading to a sudden downturn in the markets. This can put your real estate investments in a vulnerable position, as it may be difficult to find buyers for your property, who will likely request a lower price than you expect due to the lack of demand. In such an event, you may be faced with the need to liquidate your assets quickly.
What to do then?
Investing in real estate can be a great option for those looking to make a profit. Real estate investment trusts (REITs) and exchange-traded funds (ETFs) which include real estate entities can provide investors with a quicker exit to get their money settled faster. Additionally, funds that have real estate products in their portfolio can provide investors with a safeguard against liquidity risk. While investing in real estate may present some risks, it can be a great way to diversify an investment portfolio and potentially reap rewards.
Taking on debt can be a risky endeavor for any individual. In order to pay off loans, many people are forced to devote a large portion of their life to building up their wealth. However, taking on too much debt can be dangerous, and home loans in particular can take a long time to pay off. Furthermore, there is no guarantee that the amount of interest paid to the bank on a loan will be reflected in the appreciation of the value of the real estate investment. If the value of the property were to depreciate, the amount paid to the bank could become excessive. For these reasons, it is important for people to consider the risks associated with taking on debt before making any major financial decisions.
When comparing Harish and Geeta, it is clear that Harish has made a much more profitable long-term investment. Harish invested 1 crore into a Portfolio Management Service (PMS) with XYZ Pvt. Ltd. for 10 years, with an expected return of 18-20% after taxes each year. On the other hand, Geeta bought a real estate property of the same value and gets a rental income of 5 lakhs after taxes and maintenance costs, a return of only 5%. When considering inflation of 6%, Harish has a return of 12-14%, while Geeta has a return of -1%. Harish has made the more profitable investment and has a greater opportunity cost over financial products that could grow in value.
Investing in a portfolio management service is not a necessity for all investors. Rather, it is an investor's personal choice based on their individual financial goals and risk appetite. There are other options available such as high-yield bonds, mutual funds, and stocks that may provide greater returns over time. However, these options also come with their own risks, such as liquidity risk and volatility, that must be taken into account when making an investment decision. Therefore, it is important to do your research and make an informed decision that best suits your individual investment goals and risk profile.
Thank you for reading. I hope you have liked it.
Utkarsh Chhapchhade
yourinvestmentadvisorutkarsh@gmail.com