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Tuesday, March 16, 2010

Does real estate really qualify as an investment?

For most small investors with only a few lakhs to spare, investing in real estate is out of the question. If you want to buy a piece of land and build a house to live in, or buy an apartment for personal use - it really doesn't count as an 'investment'.

The online Merriam-Webster dictionary defines 'investment' as an outlay of money usually for income or profit. From that perspective, the house or apartment that you live in does not qualify as an investment because it neither produces any income (unless of course you rent out a portion) nor any profit (unless you sell it).

Buying a house and renting it out completely can qualify as an investment. Some people book or buy apartments only for the purpose of selling at a profit. This type of 'investing' requires serious amounts of money - upwards of Rs 3-5 Million - which puts it beyond the reach of small investors.

In several posts I've written about why investors should have an asset allocation plan (read Chapter 12: How to Reallocate your Assets in my FREE eBook) and then be disciplined about sticking to that plan. Several readers have asked me why I have not included real estate in an asset allocation plan.

The main reason is mentioned above - it costs too much. The other reason is the lack of liquidity. If you've ever tried to sell an apartment or a house, you will know that it is a long drawn out procedure with the involvement of property brokers, lawyers, local toughs (with each extracting their pound of flesh). Not to speak about the contrasting colours of money used in completing the transaction.

There are some real estate funds from HDFC, Kotak, ICICI. They are mostly targetted at high networth investors (HNIs) with a minimum investment of Rs 2.5 Million and are closed-ended funds of long duration that invest in real estate projects. Again, beyond the reach of most small investors.

ICICI has a hybrid real estate fund that invests in the equity and debentures issued by real estate companies like DLF, Purvankara and others but its performance is nothing to write home about. A couple of real estate venture capital funds have also been floated by DHFL (Dewan Housing) and Kshitij (Pantaloon) - meant for HNIs.

Last, but not the least, are stocks of real estate companies. Many such companies are emerging out of the woodwork of late with fancy-priced IPOs. They should be avoided like the plague. The leaders (in terms of market cap) like DLF and Unitech don't really have stellar reputations or track records either.

If you like and understand the real estate space (I don't) and want to invest in it, the best bet might be to go for stocks of companies that have already established a good reputation in other group activities - e.g. Godrej Properties, or Mahindra Lifespaces. The chances of incomplete projects or poor construction materials are likely to be less.

That was the long answer. The short answer is: it doesn't.

3 comments:

Jalal said...

Thank for your Real Estate Post. Now i Understood real risk Involved in Real estate Companies.

The chances of Incomplete Project is the main risk.

Tony said...

Actually, I believe that Real Estate, BY FAR, exceeds ANY INVESTMENT ON THE PLANET!!! I've personally enjoyed ROI's of 8,000% to 21,000% (infinite) on "a single investment!" Most people don't make real money in Real Estate Investing because of the very shallow understanding of High leverage and low risk transaction engineering. For instance...Are you guy's aware of the ("once again") unlimited opportunity in the US to create wealth? Our country right now is experiencing what we did in 1989 when the finacial market crashed. We are once again faced with an ENORMOUS wealth opportunity for the INFORMED! Please, seek the right education and you'll see that this financial crisis in the US has only begun. If you would like a free tip on where you might find a gold mine for Real Estate Investing...talk to a Real Billionaire on the subject @ www.gaithouse7.wordpress.com or www.gaithertony@facebook.com

Much success!

Alkesh said...

If small invester really want to earn out of real estate, He needs to be smart then others.

If you buy a house, your profit depends upon how cheap you buy compare to others.
Its un-organized market, when you do inquiry there is different rate & when you actully buy there is different rate (difference can be big enough).

If you are average, then chances are very less to make any money, because of commission, agents fooling you, etc. &
once you sell house, how do u manage 20 lakhs or 25 lakhs cash, if u go out to buy house, u buy same house which u sold!!