Many young employees are attracted by real estate investments for various reasons – peer pressure, family expectations, desire to own such an asset, little or no understanding of real estate as an asset class, poor knowledge of other financial instruments and other similar reasons.
Is real estate a good investment for a young employee?
Let’s look at a case study. Kiran Rana is a 27-year-old IT professional from Gwalior who recently moved to a new organization in Hyderabad. Before that, he worked in Mumbai. His father had invested in a few fixed deposits when Kiran was a miner. These DFs are reaching maturity and the young man’s father wants him to keep the proceeds of maturity. Kiran has heard from friends and colleagues that the Hyderabad property market has been performing very well over the past few years. He wants to invest in real estate with FD maturity amount and also take out a home loan. Should Kiran do it?
Before investing in real estate assets like real estate – a house, land or commercial space – you need to look beyond financial factors. What is the purpose of the investment? Is it for returns only or for self-use as well? How long will you stay in the house or the city (Hyderabad in the example above)? Are you planning to settle there? If you do not intend to stay long in this city, it is better to avoid investing in real estate. A house should not deter you from accepting a new job opportunity. Who will manage or look after your property once you leave town?
If we look at the financial factors, remember that rental income is very low in India, especially if you invest in residential property, where it is only 2-2.5% per year. Capital appreciation also depends on several factors. On top of that, transaction costs, which include stamp duty, registration fees, legal fees, brokerage, etc., eat into short-term returns. Liquidity is another big issue with real estate. You cannot make partial withdrawals from your investment. In an emergency, you may need to sell your property below market rates. You need to consider all of these factors and compare them with other investment avenues available to you.
You should also keep your overall asset allocation and liabilities in mind. Remember that moving from FD to real estate is a reallocation of debt to real estate in your investment portfolio, if the property is for investment purposes. Therefore, assessing your exposure to debt, equities, and other asset classes relative to real estate is also extremely important to gain context on the financial impact of a real estate purchase on you.
The author is founder and managing director of Kairos Capital
(Disclaimer: The views expressed are those of the author and Outlook Money does not necessarily endorse them. Outlook Money will not be liable for any damages caused to any person/organization directly or indirectly.)