The Concept & Advice on Housing

Mr. Gerard Colaco: Everyone should own a residence of their own. This is most applicable of course, to those who are not fortunate to have already taken steps in this direction, and/or those who are not fortunate enough to be sure of inheriting a house or apartment. So you can say, a house or apartment is an essential part of any financial plan.

Now comes the question of further investments in real estate. We find that where real estate is concerned, normal people can be classified into two categories:

1. Those who have a genuine talent for and interest in real estate investments; and

2. Those who have neither the talent nor the interest in such investments.

For people who fall in the second category, the advice given by some of the best real estate consultants that we have come across is: purchase real estate only if you have a use for it.

Everyone has one basic use for real estate and that is the need for a dwelling place. So, everyone must own a house. Now, consider the case of a practicing physician. He will need a residence as well as an office. He must ideally try to own both, because he has a use for both.

Let us take one more example, that of a person who manufactures and sells furniture. Such a person requires a residence, a workshop (which need not be in a centrally located area) to design and manufacture furniture, and finally, a showroom in an excellent location, to exhibit and sell the furniture. Such a person must try to own all three: his house, workshop and showroom.

For a person who does not have a flair for real estate, additional investments in real estate are not advised. Undoubtedly, real estate is an excellent long-term, wealth enhancing avenue of investment. However, it suffers from certain drawbacks.

·        It has extremely poor liquidity. You can sell a stock on the stock market instantly and get your payment within 3 days. Similarly, you can encash a mutual fund investment within an outer limit of a week. But you cannot dispose of real estate quickly and easily, even in a boom.

·      There are difficulties and dangers in verification of title when you purchase real estate.

·        Large amounts of money are required even for a single purchase.

·       Large amounts of money are required to make additional purchases, if you are willing to do so, when prices fall. For example. Let us say you have purchased stocks worth Rs 30 lakhs and also real estate worth Rs 30 lakhs. Both purchases have been made, when markets were high. Now the markets fall and both your stock market portfolio as well as real estate property are valued at Rs 20 lakhs each. You want to make additional purchases. You can buy stocks even if you have just Rs 1, 2 or 3 lakhs. But to make additional real estate purchases, you would need much more, perhaps even Rs 20 lakhs.

·       There is the presence of substantial black money components in real estate transactions.

·       There are high stamp duties to be paid on purchases of real estate.

·       Formalities pertaining to the purchase and sale of real estate are cumbersome.

·       Once you have purchased real estate, there can be administrative problems. You need someone to look after it. There are many problems associated with absentee landlordism, such as encroachment, squatting, deterioration of houses / apartments because of keeping them locked up, etc.

All these matters must be carefully considered, before venturing into real estate investments, because real estate is easy to get into, but difficult to get out of, especially if you have made a mistake.