One question that I have got consistently from doctors is “Should I invest in more real estate?”.

It does not matter whether the doctor is in Ranchi, Coimbatore, Indore, Chandigarh….or wherever. And I am stumped because they already have a place of work (clinic, hospital, or…) one house in which they are staying, one house which they own but currently being used by their parents, one house given on rent….and have about Rs. 40L in bank fixed deposits and Rs. 450,000 in equity mutual funds.

So you are talking of a net worth of say Rs. 8 crores, out of which almost EVERYTHING is in Real Estate. I keep wondering what to tell them (remember I may not meet them for the rest of our lives!)..

Unlike the general populace doctors ask this question even now in Gurgaon where property prices are so fragile! Of course most doctors (if not all) cannot calculate the IRR on the properties that they already own, so they are blinded by the RE obsession so common to doctors. One doctor told me that the so called friendly bank RM sold me 3 ULIP which some other financial planner said was “not worth the paper on which the policy is printed”. So doctors who understand that they do not understand mutual funds and ulip think they are “in control” when they buy RE. Ha.

So I instead ask them a few questions:

  • do you max out your PPF – self, wife, huf, children, dog – what have you!
  • do you use PPF, ELSS, and leave it there for the real long future?
  • Do you have at least 20-25% of your net worth in equities?
  • Do you have any emergency fund?
  • Do you have adequate term insurance?
  • All your properties are within 3 km radius of the most expensive but lousy city, does that bother you?
  • do you think your children are interested in these properties and land lord behavior?
  • what is the “distress sale price” of all your properties? does that worry you?
  • I just calculated your friends IRR in real estate – it comes to 7%. Does that worry you?
  • Have you paid off all your past debt?
  • You are 55 now – its time that you have a succession plan. Remember your rental income is pretty high too!

Now if your answer to any of these questions is “maybe”, you should NOT CONSIDER buying another piece of Real Estate. If you are thinking of starting a new hospital or clinic ……well here is what I tell them later on:

  • Your asset allocation is wrong – you need to be in equities and perhaps some short duration debt funds.
  • The Irr on your past RE investment is just 7% pa way below PPF
  • The bank’s REIT offer is a pure element of shit – stay away please
  • RE needs some seriously active management like collecting rent, maintenance etc.
  • You have no specific advantage doing this

well…the real life answers could be longer….

  1. Dear Subra Sir,
    This involves me directly since I too belong to that fraternity. Following you since last few years has enabled me to answer atleast some of the above questions with a YES. But I could not understand what is a “distress sale price”. If possible please explain.

    Secondly you said that REITs are not good. I am in no position to contest that since I do not have the acumen to analyse it. If possible please educate us regarding this. Recently AXIS Rera opportunities fund people also approached me. I felt it was better than investing in a single piece of Land/RE. Still I did not invest simply because it was a large ticket investment way beyond a middle class doctor like me. Do you have any take on these types of investments?

    Kishan

  2. There are three kinds of people in this world.

    1. Those who are already wise and knowledgeable about investing.
    2. Those who aren’t yet wise or knowledgeable, but are humble enough to learn from experience, other people, books, etc…
    3. Arrogant idiots – those who help #1 and #2 get wealthy.

    You can’t help #3.

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