Most people invest in equities, debt, real estate, …..and I guess they invest so that they are able to sell it at a premium later on, right?

Well, when people speak to me they say “I bought a house for Rs. 80 Lakhs in just 10 years it is worth Rs. 1.9 crores”.

Nothing wrong with this argument, except that it is wrong.

When this person bought the house he had to make a down payment of Rs. 15 lakhs and he took a loan of Rs. 65 lakhs. He also paid a brokerage of Rs. 1.5 Lakhs, stamp duty, loan processing fees, society charges, etc. This cost has been ignored.

Assuming that the flat is worth Rs. 3.7 crores at the end of another 10 years, now let us calculate what return he has got:

EMI: 65000 * 240 = 1,56,00,000  +15,00,000 +other expenses  1,50,000 + Interest 20 years            10,00,000

so the total cost of the flat is about 1.82 crores and that is now about Rs. 3.7 crores.

Sure the rental income has been ignored, but if you put this in an ixrr or irr calculator you will realise that the returns are not too high!

Now if you take the case of Equity, the returns are not magnified  because we NEVER LEVERAGE – the way we leverage with Real Estate.

So if you have to compare this Real Estate deal should be compared to an equity investment made in 1988 – say Rs. 80L – Rs. 15L of own money and Rs. 65L of borrowed money. You need to use a part of the proceeds to repay the loan. Then see how much is the comparative return.

My guess is take any 20 year period from 1979 to 2013, invest LUMPSUM and withdraw every month or quarter to repay the Loan, chances are equity would have out performed real estate.

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  1. i expected somebody to say what harish just said….obviously this is only an example. Also for most middle class investors investment in equities NORMALLY means a few THOUSAND rupees. Bought adhoc, kept adhoc, SOLD adhoc…Whereas a house is used for say 20+ years and then price compared….and as Subra says the interest cost is ignored!! So when you say ‘you can make money on equities’ they look at you suspiciously. Excel sheet, annualised retrn, total return, risk adjusted return….all be damned!!

  2. People are just grateful to have a solid, visible asset that they can console themselves with and also show off to their near and dear and sometimes to their detractors.

    Even with good math/ financial analysis skills , they would rather not check the returns. Also it is an asset that is being used even as it gains in value , so nobody wishes to overlook that.

    Also there are ways of getting returns without borrowing heavily or going overboard, but I guess you know whom to turn to , to do that !!!!

  3. Agree with Pooja. Real estate returns look good because of: a. leverage b. ability to pay EMI without selling the asset c. long term of uninterrupted payment d. Inflation.

    If all the same CONDITIONS hold true for the next 20 years, RE will be a good investment. HOWEVER, if you are not able to pay…you could (you will!) land in big trouble.

    Prakash – Investing without borrowing is an alien concept for some born in 1970s and for ALL who were born post 1980….

  4. I have accounted every paisa that I have paid towards my flat at various times that included house warming ceremony, interior work and small upgradations. This was purchased 10 years ago at Bangalore with bank loan. As I compare all the costs that I paid, I do not see any positive returns today.

    Some hard lessons learnt. At the time of closing the loan, the interest charged was very high 13.5%. The tax benefits became irrelevant after few years of purchase as I had become NRI. I did not get any rental income as I gave it to my relatives to stay for couple of years. We had to contribute for the builder unfinished tasks towards amenities. Even if rental income is generated now, I had to compromise the rent amount for getting a decent tenant.

    However the above experience protected me from committing the bigger blunder after I became NRI. I have neither bought any RE in last 7 years nor shall buy any in future. I don’t want any RE in my portfolio. Infact I am putting all my efforts to get rid of these white elephants.

  5. Vibhavi : I am conservative like Subra in discouraging home Loan borrowing, which only contributes to high real estate costs and leave us anxious and vulnerable as we struggle to square up the loan. However, we can generate returns without borrowing , which will appeal to all of us, irrespective of our age !!!:

    Krish : We are throwing out the baby with the bath water. Although I do agree that it is so much more difficult for NRI’s to figure out .Recent changes in the tax formalities are also a major irritant. The sector in select geographies ( armed with a suitable strategy) can definitely give you good returns

  6. 80 lakh flat becomes 1.8 crores in 10 years? that’s below FD returns. at least one should take real examples. In my personal (perhaps biased) observation i’ve seen 15 lakh property purchased 10-12 years back priced at 1.5-2 crores now.

  7. absolutely right Nitish. Anecdotal examples. As long as there is no realty index, you can say ‘look at Malabar Hill’ and I can say ‘look at Mira Road’, both right, and both wrong.

    Anecdotal examples are USELESS because we have no clue which is d best location. That is why you see Equity index returns. Wipro has given TWICE the sensex returns in the 19 year period. THAT IS AWESOME.

  8. Why won’t we compare equity vs RE from 2002-2004 the period when the actual RE bull market started in India instead of from 1979 which is irrelevant for many of us as many of the blog readers are born in 80’s and started earning their first rupee only after 2004-2007 (I think so)

  9. These are the Nifty closing values on starting days for years 2001-2007, the years many of us here started earning our FIRST RUPEE:

    01-Jan-2001 – 1254
    01-Jan-2002 – 1055
    01-Jan-2003 – 1100
    01-Jan-2004 – 1912
    03-Jan-2005 – 2115
    02-Jan-2006 – 2835
    02-Jan-2007 – 4007

    & today the NIFTY closing value is 6111

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