I have always held that Real Estate is an expense. Not really an investment. You buy a house, use it, and then sell it off.

For using this asset you pay rent or you pay the person who gave you a loan to buy it. Of course the loan repayment has to be with interest. So the total amount repaid is about 2x the loan amount.

I have very strong views that a house is ONLY a usage asset and NOT an investment asset. So if you get a return less than the rate of interest that you borrowed at, YOU HAVE LOST MONEY DOING THE TRANSACTION…

Read on ….here is an article

http://www.business-standard.com/article/pf/does-a-housing-investment-pay-at-all-1140729

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  1. Hello Subra

    Thanks for the article.

    Recently, one of my cousins sold his property in Pune which was in a prime locality. After some number crunching involving the cost price, the interest component of the loan, society maintenence charges, property tax, rent agreement charges, repair work & selling brokerage on one side and rent received, interest on the security deposit and the selling price, he discovered that the CAGR after 6 years was 14.744% which doesnt seem astronomical by any standards. And here we are talking about a locality where the rate per sq.ft more than doubled in 6 years and the rent yield was close to 7.5% (not too bad, I guess). I am not even talking about other areas !

    NOT SURE why we are unable to break this myth regarding real estate returns.

    I guess we can book disproportionate gains only if we buy a distressed property in an emerging area and then sell that off at the right time !!!! hahaha… please dont ask me, how ? 🙂
    I guess thats not impossible, may be improbable.

  2. I am one amongst many regular subra reader.Just by reading subra and then by learning to saying No..Nahi..Nakko..To Uncle and Aunt,Masa and Masi,chaha and chachi,And society by and large…I could save my self from clutches of Modern Mafia (Aka Builder and his Team)…..This is allowing me to fiace bouncers of Fast Bowler MR.INFLATION with Relative Ease…Money is available to be used in creating Other Important Goals like Education corpous and Retirement corpous….And Most Importantly never felt that i missed the Bus of 2000 to 2006 when RE was available for relativly lesser price…Most ImportantlyI learned that if we are a regular single or double income guy with children and parental responsibility…..Then itsprudent to understand that in most aspects of life Be it a vacation ,Travel,Real Estate…Renting is indeed Better than owing..This one Wisdom is creating wealth by bestowing peace to be Loan Free !Thank You Subra !

  3. Hello.its rarely the case where people money buying flats by bank loan unless it’s a distress sale. However there are several instances where I have seen (and made)people making good money by buying and selling land with full payment(no loans). I can speak about chennai where any land investment has yielded more than 18 percent returns in the past 20 years,thats some serious money. Welcome any rebuttal!

  4. Ineteresting article. However, I would like to draw a parallel to the stock market.

    Lets say that the stock market grew by 10% on an average (like the overall National Index).
    Out of that, a particular sector grew at 14% on an average (like the index for a particular city Chennai).
    Out of that, a particular stock grew at 17% on an average (like the index for a particular locality/colony).

    I believe that just like we had prudent investors in the stock market who were able to identify the correct stock, there were some in the RE arena who did the same.

    I strongly beleive that it is the same in the stock market as well.

  5. Some are investors while others are speculators. So for every success story that you hear or read about, there are hundreds of unheard failures.

  6. The property prices increase again depends on a particular area. In some prime areas, if there is no new flats/ land for sale then one can get high 20-25% return . I am talking here from my experience in Bangalore and Mangalore. Similarly in developing areas the prices will be sub 10% growth . Similar to stocks some give high returns and some don’t .

  7. Subra Sir,

    Can you put up something about Equity arbitrage funds, they are now in vogue due to taxation impact on debt funds & are being advise as the new option for parking liquid funds. the logic seems fine but may be you can look at it once……

  8. Saw one person in my hometown who ten years back used to roam on a moped. In this 10 yrs he earned so much in RE now he owns a JAGUAR car. This is the only JAGUAR car in my hometown with 10 lac population. Basically I think he is a business man then a RE fellow because he used to buy land, develop it into plots & sell it where as other ppl buy those plots and look for appreciation.

    At the same time an another rich person also developed a venture but the RE cycle turned down after it’s launch. He didn’t made any money upto now (almost 5 yrs).

    So it’s more of timing/luck.

    We hear both success/failure stories in both Equity & RE., & in RE sometime it is exaggerated. But At same time I didn’t saw a single person with this Moped to JAGUAR story in Equity. May be Jhjhunwala or Damani from Mumbai had these stories but for ppl from a Tier 2 city these type of stories or example in Equity is NIL.

    p.s: Personally Not against Equity or support to RE.

  9. Hi,

    In India for RE, every body discuss success story and hide failure story and for equity it is just opposite where failure is more highlighted than success

  10. Risk is not having enough knowledge and expertise to accomplish the work that you want to do. Be it RE or Equity or Driving or Cooking or …

  11. Sid,

    Which area of Pune is offering rent yield of 7.5% for residential property?

    Are you calculating rent yield by dividing today’s rent by purchase price which is 6 yrs old?

    Also, if your cousin got 14.7% CAGR; it is not bad at all for property.

    I know several people who have made post tax gains in range of 15-17% CAGR in residential property. But those are active investors and know the markets. They usually buy the pre-launch offers and some their properties are semi-commercial.

  12. Hi,

    I think for a real estate as an investment for middle class man is to buy a plot at much lesser price, even if it is far away from prime locations and wait for some 15-20 years. Even he can look for the cities which are developing like tier-2, tier-3 cities.
    Consider 15 years before and now , how much that gives return in your city. Even if doesn’t give same much result 15 years from now, i think it will give you good returns.

  13. Pressure on me to buy RE, here are a few tales my parents have told, 1) a relative of mine bough a plot of land 30 years ago for 2L, now is hoping to get 1CR. Great investment! Now retired, depleted his earnings, Has been trying to sell it for 2 years. 2) neighbour bought an apartment for 90+L, hoping it would be a good investment.Other flats are available why dont you buy one? home loans are very easy to avail & tax efficient.

  14. @Nikhil, In my above example the guy who bought JAUGAR is able to do it by selling plots to people but not by buying & holding it

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