Mr. Gerard Colaco: A study of the history of growth investments clearly reveals that there
are only two avenues of these investments that have consistently beaten
inflation over the long-term. These avenues are equity and real estate.
REAL
ESTATE & BULLION:
Here, we
will deal mainly with real estate. But before we do so, we would like to
briefly comment upon one more avenue namely gold or bullion, which most people
think also increases wealth over the long-term. Timothy Green, a well known
bullion expert, reminds us of a historical truth: "The great strength
of gold throughout history has not been that you make money by holding it, but
rather that you do not lose. That ought to remain its best credential."
So gold can at the most preserve the value of your money over the long term. In
other words, gold investments can grow at a rate approximately equal to
inflation. Investing in gold does not beat inflation.
Investors who had invested in a good piece of real estate 20 or 30 years back would certainly have increased their wealth considerably in this period, even after discounting for inflation. That brings us to the question of whether an ordinary investor should invest in real estate.
Investors who had invested in a good piece of real estate 20 or 30 years back would certainly have increased their wealth considerably in this period, even after discounting for inflation. That brings us to the question of whether an ordinary investor should invest in real estate.
Real
estate suffers from certain drawbacks. One is poor liquidity. Even at the
height of a real estate boom you cannot acquire or dispose of real estate as
easily as you can buy or sell equity shares or mutual funds. Next, is the
difficulty of averaging downwards or making use of a fall in real estate
prices. For example, if you have bought real estate at the height of a boom and
now prices fall by say 35 or 40%, you may be willing to buy more real estate,
but may not have the money to do so, because each purchase involves a big
outlay. On the other hand, in the stock market, you can add to your portfolio
as the market goes down, with even small amounts.
Next, there is a risk of imperfect title when you purchase real estate. Even a single purchase requires huge amounts of money. In equity on the other hand, you can start an investment in a mutual fund with Rs 500/- or less. Furthermore, when you purchase real estate, you pay an average stamp duty of 10 to 11 per cent. Whereas there is no stamp duty for purchases of equity shares. For people whose financial affairs are clean, there is also the tremendous problem of black money which is virtually an integral part of real estate transactions.
Next, there is a risk of imperfect title when you purchase real estate. Even a single purchase requires huge amounts of money. In equity on the other hand, you can start an investment in a mutual fund with Rs 500/- or less. Furthermore, when you purchase real estate, you pay an average stamp duty of 10 to 11 per cent. Whereas there is no stamp duty for purchases of equity shares. For people whose financial affairs are clean, there is also the tremendous problem of black money which is virtually an integral part of real estate transactions.
Finally,
by investing in a diversified portfolio of stocks, which includes stocks from
the real estate sector, you can make real estate part of a diversified equity portfolio.
But you cannot do the opposite - you cannot make equity part of a real estate
portfolio, because it would then cease to be a real estate portfolio, unless
you went in solely for real estate-oriented stocks!
One
important question to answer is: Should a common investor go in for real estate
in addition to one residential house (which is compulsory)? There is no easy
and final answer. Let us give you our opinion, which is based upon the advice
of some of the finest experts on real estate investment, at least in India.
What these experts say, is that common investors can be divided into two broad categories where real estate investment is concerned.
What these experts say, is that common investors can be divided into two broad categories where real estate investment is concerned.
The first category consists of people
who appear to have a certain talent for real estate investments. They have an
interest in real estate as well as a flair for real estate and before long they
build a good and profitable track record of buying and selling various real
estate properties. If you belong to this category, by all means press ahead with
real estate.
If not, then the only advice given is, to buy real estate only if you have a use for it. Let’s look at three examples:
If not, then the only advice given is, to buy real estate only if you have a use for it. Let’s look at three examples:
Example 1: Everyone has one basic use for real
estate and that is a residence, because everyone needs a roof over their heads.
Therefore every individual must try to acquire and own one residential
property.
Example 2: Now, let us take the case of a doctor who needs an office where he sees patients. Such a person must aim to own his house as well as his office.
Example 3: Finally, take the case of a person who manufactures and sells furniture. This person needs a house, a building and compound (not necessarily in a good area) in which his workmen can design, and manufacture the furniture, and finally a showroom in a prime location where he can exhibit and sell the manufactured furniture. Ideally, he must try to own his house, his workshop and his showroom, because he has a use for all three.
The bottom line therefore is: If you belong to the category of people who do NOT have a flair for, and interest in real estate, it may not be advisable to acquire real estate in addition to your house, if you do not have a use for it.
Example 2: Now, let us take the case of a doctor who needs an office where he sees patients. Such a person must aim to own his house as well as his office.
Example 3: Finally, take the case of a person who manufactures and sells furniture. This person needs a house, a building and compound (not necessarily in a good area) in which his workmen can design, and manufacture the furniture, and finally a showroom in a prime location where he can exhibit and sell the manufactured furniture. Ideally, he must try to own his house, his workshop and his showroom, because he has a use for all three.
The bottom line therefore is: If you belong to the category of people who do NOT have a flair for, and interest in real estate, it may not be advisable to acquire real estate in addition to your house, if you do not have a use for it.
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