Why should real estate be a part of your investment portfolio
Some of the major determinants of the returns from an asset class are the choice of assets within that class, the timing, and the duration for which the asset is held. However, for real estate, the returns vary tremendously over locations and market cycles. Since the transaction costs are high, it is virtually impossible to switch properties if the initial decision does not turn out to be the correct one.
While the stock market has an index which allows us to measure the rate of the return scientifically, the job is tough in case of real estate. There are specific cases in certain locations that have generated higher returns as compared to others across land, residential, retail and commercial spaces across the country. As per a study conducted by Cians Analytics on the returns from various asset classes in India during 1991-2013, real estate and equity have provided maximum returns to the investors. Looking at the overall returns, the study stated that real estate outperformed all the other asset classes during the 23 year period with an annual rate of 20 percent while equity generated an annual return of 15.5 percent on a nominal basis during the past 23 years. However, the equity market defeated all the other asset classes during the period ending December 2018.
Additionally, let us not forget the value of rent or lease. When you invest in stocks, you only earn returns and dividend. Whereas, in real estate, you have the option of either leasing or renting the property. This way, an investor can earn additional regular returns while the value of the property keeps on appreciating. The rent is usually higher than the dividend. The release of dividend and the quantum of it are uncertain and irregular, but rent can be earned every month.
Another point that you, as an investor, must consider is the liquidity rate. Equity stocks come with a high liquidity rate, which means that you can sell the shares and convert them into money easily. On the other hand, it takes really long for an investor to liquidate their real estate asset. It is a hassle-filled process. Therefore, if you are looking at investment options that have a high liquidity rate in the short run, then stocks are a great option. However, if you can hold the investment for long, then real estate is good for you.
Lastly, if you are planning to start small and cannot avail a loan, then equity gives you the liberty to start your investment with a minimal value. Moreover, with the Systematic Investment Plan (SIP) option, you can plan your equity investment in a way that you have substantial corpus as well as returns earned through the magical effect of compound interest. On the flip side, if you can avail a loan, then you must consider investing in real estate and later rent out the property. The money earned through the rent can be used to repay the Equated Monthly Installments (EMIs). This way, there is no additional stress on your finances.
The experts opine that the battle is not between real estate or equity. It is deciding when to invest and how much to invest in each of these sectors. While both asset classes have their merits, real estate as an asset class seems to offer promising returns to an investor who is willing to invest for the long term.