I love real estate. I have almost negligible investment in stocks, mutual funds and bank deposits. Though it is not recommended to have all your investments in one asset class, I have never been a big fan of diversification. Before I go further let me clarify that return on real estate over long term has been lower than that of stocks. The below table shows the return on stocks vs that of real estate over a period of 5 to 20 years. I am not getting into the authenticity of the data here.
So, why do I still say real estate is better than stocks? The return shown in the table is valid only when you bought the shares or gold or property and held on to it for the entire period i.e. if and only if you were able to hold on to your investments for the entire period of 5 /10 / 15 / 20 years you would have achieved these returns. Now that’s very very unlikely in the case of stocks because of irrational human behaviour. I will cover this aspect in this article as well.
Reasons why I like real estate and why I believe investment in real estate is better than those in stocks are as follows:
1) Less Price volatility
Real Estate prices do not fluctuate as much as those of stocks on a daily, monthly or yearly basis. At least prices of real estate are not “visibly” volatile. Your property value might be going down and you may never know it since there isn’t a daily ticker trading on a exchange like those of stocks on a stock exchange. Even if the economy is not doing well & prices are going down, rental income will cushion the blows to some extent.
When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom. Hence, you don’t get panicked and behave irrationally when the prices of stocks go up & down violently in short period. This irrational behaviour forces almost all investors in stocks to not take a long term views on the investment. Since there is no “visible” way to find out yearly or monthly or daily rise & fall in the prices of real estate, investors tend to take much longer term exposure to their investments.
2) Power of Leverage
This is the biggest advantage in a real estate investment. Banks love to lend to home buyers, typically up to 4x of their capital. For ex – to buy a property worth Rs. 10,00,000/- banks can lend you up to Rs. 8,00,000/- (80%) subject to your eligibility. Hence, with a capital of Rs. 2,00,000/- you can buy a property worth 5x! You won’t do that in stock investment or mutual fund investment. No banks or financial institutions lend you to invest in stock market or mutual funds.
Leverage in a rising market is a wonderful thing. Even if real estate only tracks inflation over the long run, a 4% increase on a property where your down payment was 20% is a 20% return on your equity investment. On the other hand Stocks generate roughly 10% to 14% a year including dividends as shown in the above table.
3) Income Tax Deductions
Central Government provides income tax exemption on interest expense up to Rs. 2 Lakhs for residential properties. Prior to budget Feb’17 this deduction was unlimited on rented out property providing huge incentive to investors. If you own properties via a firm, all expenses associated with managing your rental properties are also deductible towards your income. None of these incentives are available on investment in stocks.
4) Hedge Against Inflation
Real Estate, just like Gold, is an excellent hedge against inflation. As inflation occurs, housing values as well as rents go up. Let’s take this example – You acquired a property worth Rs. 10,00,000/- (Ten Lakhs) in 2016. After one year with an average inflation of 4%, the same property shall be worth Rs. 10,40,000/- i.e. a gain of Rs. 40,000/- on an investment of Rs. 10,00,000/- (assuming no borrowing; if there was borrowing return would be even higher as described above in “Power of Leverage” section.). So even though value of money has decreased due to inflation, property price appreciated to negate the inflation effect. Ditto with rental income. Hence, a perfect hedge against inflation! The table above shows how the return on real estate beat the inflation handsomely.
5) Absolute Control on Investment
When you own stocks of a company you are one among few lakhs of shareholders who own a piece of the company. You have absolutely no control over the company – you are just a “taker” of the stock price as you can’t influence the business, make changes in the company, hire or fire the management etc. You are at the mercy of the company’s management who may or may not perform well to ensure your investment is protected.
However, when you buy a property you completely own it. You have absolute control on your property. You can make internal modifications in the property to make it look better which might increase your rental income. You get to decide on your tenants. You can market your property as per your convenience and expectation. You might have a loan from the bank, but that doesn’t stop you from doing any of these things.
6) Real Estate is Local
Your property price say at MG Road in Bangalore or Lower Parel in Mumbai won’t go down just because US Fed decides to increase the rates or Greece defaults on its payments. However, that action might have negative impact on Indian stock market as FIIs will start pulling out money from India, adversely affecting the stock prices. Thus, real estate is much more insulated from the national economy as well as the global economy.
7) Wow Factor
Real Estate has wow factor. If you tell your friends I own a floor plate or a part of floor at UB City in Bangalore they will go wowww. Really, you must be a super rich guy!!! You get to brag about your real estate ownership – I own a flat in this project, a villa in that. Nobody give a damn on how many shares you own in Infosys or TCS. Stocks simply don’t have the wow factor. However, never buy a property just for a wow factor 🙂 You will regret it later.
Choosing real estate over stocks or stocks over real estate must be a personal decision. There isn’t a right answer to the question “which is a better investment – real estate or stocks?” Its like choosing between an apple and an orange. Decide based on your risk appetite, investment philosophy and personality.