Here are five reasons why I will never invest in real estate. This is me taking sides on the equity vs. real estate debate. There is more to investing than returns. So instead of comparing past returns of both asset classes and claiming equity won or real estate won, I would like to consider other important aspects.
So here goes. I will never invest in real estate because,
1. It will skew my asset allocation perhaps forever
Personal finance has two components: insurance (or fortification) and investment.
Investing is all about the right asset allocation. I don’t want to ‘invest’ in an asset that will grab a big chunk of my asset allocation pie perhaps forever.
There are two ways to buy real estate: dip into your liquid net worth and/or leverage. Even if we assume leveraging does not backfire, I will never be able to find the right balance in my asset allocation.
It is never real estate and equity and fixed income. It is always REAL ESTATE and equity and fixed income. Once I choose to buy real estate, it may take years, if not decades, for other asset classes to occupy a significant portion of your portfolio. I do not find that appealing.
Why would I buy an asset class that practically eliminates my ability (see below) to freely control asset allocation percentages?
2. It is hard to assign “present value” and calculate ‘growth’
I have a real estate returns calculator, but obviously its output depends on inputs! Most people talk about how much their property is worth without actually speaking to potential buyers. It is only when they do so, reality dawns. They would rather ‘wait’ and enjoy low rental yields rather than sell for a ‘low’ price. There is no designated market price. He who haggles the best, wins here. If there is no universally agreed market price, I cannot understand how risky the asset class is.
I am afraid I do not have the ability to transact without data or wait indefinitely for the right buyer to come along. Would like to buy and sell stuff with a universally accepted price tag attached to it. Would like to buy asset classes with quantifiable volatility.
3. It is not liquid enough when I wish to sell.
This I am sure you have heard before: You cannot sell a small chunk of your property when you feel like, unlike marked to market asset classes which can typically be traded in small amounts and on any business day.
Whether I trade for profit or loss, the freedom and the ease associated with the transaction appeals to me.
4. It may not be liquid enough even after I sell
The taxman considers capital gains from real estate to be a different species. While there no rules ‘what should be done’ with capital gains from equity or fixed income, real estate CG should necessarily be reinvested in property or in section 54EC bonds (with pathetic post-tax returns – close to SB account returns for 30% slab) for 3 years to ensure the capital gains are tax free.
I recently advised a family to pay tax, equivalent to 16% of selling price, and enjoy the liquidity from a real estate purchase. This is much lower than the 30.9% tax on monthly income they were paying. However, they did not see it that way. For them, the loss of “several lakhs” to the taxman was unacceptable. They would rather let that sum languish in another property or in an infra bond for 3 years than pay “that much tax”.
If one does manage to sell, and pay the capital gains tax, this reason does not apply, but then again …
Will such logic escape me, if I sell property? I don’t know. Why would I enter an innumeracy trap on my own accord?! I would rather not own any investment property.
5. It has ’emotional attachment’ issues
Many retirees who do not have the means of inflation-protected income ought to sell their invested properties for enough liquidity. Not many are able to do that. They are too fond of their ‘achievements’ and/or want to leave that as estate to their children. They believe it is their duty as parents to leave behind property to their children. Some who do want to sell are shocked at the actual selling price!
Again, will such logic escape me, if I need to sell property when I retire? I don’t know. Why buy an addictive asset class and risk financial independence in retirement?
Like I said, there is more to investing than returns.
PS. for the price the broker quoted the above-mentioned family, the CAGR over 20 years was 14%. When buyers came to see the apartment, no one was ready to gift the family ‘that much’ return. Last I heard, they have ‘shelved’ the idea of selling.
V Muthu Krishna suggested I add two more reasons:
6. risks before possession
These include legal risks of ownership, delays by builder, non-completion of all amenities, stay orders, deviation from plan, quality issues, etc.
7. risk of renting out
No guarantee of regular income. One may need to constantly look for tenants. Issues with paying property and water tax, and the legal hassles associated with tenants not moving out!