Is real estate a fantastic Investment?

If yes, are the math tools available to prove that?

If no, are the math tools available to prove that point of view?

The jury is still out there to judge these questions and there are no clear answers. However I found an article in the Times of India (it is an old article, May 2014)..and am reproducing it here.

Read the article carefully – when it is considering the costs, the author has considered only 6% costs – in reality there is a 6% stamp duty, there are society entry fee, brokerage, if the paper work is done by a lawyer then the lawyer’s fees…in all practically the costs come to about 8% – and some times it can go higher to about 10%.

While considering the rentals, he has assumed A FULL OCCUPANCY with a clear annual increase – nice assumption, rarely holds true.

He has ignored society charges – assuming Rs. 1000 a month – that also changes the equation by a bit.

Instead of saving money in a bank fd, if the person were to keep it in an EQUITY mutual fund, the whole gain is TAX FREE….

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1. ##### Siva

Hi Subra,
The article compares the profit of real estate with the total returns of FD/RD (investment amount + interest). So it is a wrong comparision. The real comparison should be something as below.
Real Estate: a+c-d-e-f+h = 73,76,039
FD/RD : 44,41,919

Regards,
Siva

2. ##### Divakar

Hello Subra,

Apart from expenses you have considered, I think we also have to consider Corporation taxes and maintenance expenses of the flat. Then the real return will be still lesser

3. ##### bhushan

Consider a scenario. Husband has a sudden death at age 45. House in his name. there are noyt enough income sources. If the wife tries to sell house everyone knows it is distress sale and so she wont get market rate she will get very low rates.

Consider other scenario. Husband dies. Has MFs/Equity worth 1 crore. Stock market or mutual funds dont know about the wife’s situation. She gets to redeem complete/part of it as she wishes.

Which investment is better?

Note – The biggest problem with real estate is liquidity. You cant sell it easliy when you need it the most. Ask any seller in distress

4. ##### VK

Guess the most important lesson appears to be – LEVERAGED RE investment does not appear to be a good investment.

So far I’ve made two RE investments. No leveraging in one and ALMOST no leveraging in the other (I got <10% of it financed). Got good returns on the first one, more so because it was a plot. The second is ongoing but the builder has already caused delays which is very annoying. In ~5-yrs time I'll know how it turns out. Both of them have certainly been pain in the *** though…the entire process.

Of course, I haven't kept away from equities in the meantime. Still learning the ropes though. Hopefully, will switch completely to equities when I have a better understanding of what I am doing.

5. ##### bhushan

This is a para from one of the article in Livemint.com. This shows the biggest risk in investing in land in India. (poor land records and long pending court cases to be blamed)

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Two, think very deeply before investing in land, especially if you are likely to keep the land barren, and treat it as an investment to be encashed, say, for when your daughterâ€™s education is to be funded. In India, where the accepted method is to acquire small land holdings from farmers, and consolidate them to register, there is a lurking danger that a legal heir, who may not even have been born when the sale happened to the developer, could cite personal law and claim inheritance rights on that land.
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Source – http://www.livemint.com/Money/j65uTYjZhcnUaTcSwWYIuL/Property-investing-all-returns-and-no-risks.html

6. ##### Gunjan

Do the same math for 20 years and see the difference…