Getting ready for real estate? Think again
Stock market rallies are usually followed by a jump in real estate prices as investors book profits on stocks and sink their money in property. Thanks to expectations from a new real estate regulator and an overall upswing in the mood of the economy people are beginning to sniff the air for real estate deals once again.
But real estate remains a really bad investment at current prices although this doesn’t mean you shouldn’t buy your dream home (as long as you will live in it).
Real estate is a clunky asset. Selecting, inspecting, bargaining, filling in paperwork, checking the authenticity of the deal, registering the property -- these are just some of the many steps in a real estate transaction. Prices vary (the neighbour got a better deal). And there’s the gap and the pain between deciding to sell and selling -- a down market can last for years. It is also a chunky asset—you can’t sell just the kitchen if you want a fraction of the money you invested.
The black money component is another put off, unless you are buying directly from a builder. Then, that comes with its own problems of delay, misinformation and, in some cases, outright cheating. Despite the noise around the real estate regulator, it will still take years for this industry to build a better track record. The Rear Estate Regulation Act or RERA is far from being of any real use on the ground. The states are simply not ready with their regulators, websites or processes.
So, what’s a good real estate strategy? At current levels of prices and yields, it makes far more sense to rent than to buy.
In Delhi, in an urban mass affluent locality such as Mayur Vihar a three-bedroom, hall, kitchen (bhk) apartment costs anything between ₹1-3 crore according to property listing sites . Let’s take the cost as ₹2 crore.
Rents, on the same sites for similar properties, range between ₹25,000 to ₹35,000 a month. Let’s take it as ₹30,000.
An investor who buys this property for ₹2 crore will rent it out and earn an annual return of 2%.
The actual return is lesser after maintenance and taxes. The same ₹2 crore in a monthly income plan (a debt fund with a 20-30% equity component) gives a return that ranges from 7.28% to 17.52% (three-year average annual returns according to fund tracker Value research).
Real estate as an investment makes sense when prices come down or rents go up, when the market is better regulated, and when there are professional agents and estate management firms that handle transactions and then management.
This may be have been the only avenue of wealth creation 20 years ago. Markets have moved on and so must we.
Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at monika.h@livemint.com