Real Estate - Not a good investment?

[red-devil]

Like most other people, I've grown up believing that real estate- a house/property is perhaps the best way to invest. I'm at that stage of my life where I have to decide whether to buy a house/buy a plot of land or invest money somewhere else that would give me a good return. Property wise, I'm only looking at Bangalore - things may or may not change on this.

Now I was talking to a colleague of mine on this topic and he came up with this argument that investing in a residential property is not worth the effort one will have to go through - the argument being, if you buy a house with the intention to rent it out, then the rent you receive will not offset the EMI and the differential that you pay for the EMI will not be worth the money you save on other fronts - such as tax benefits. Additionally, there's this problem of maintaining the house as well. A tenant will never take care of the house as the owner.
That said, if you live in the house (and not rent it out), then again the money saved on rent will not offset the EMI /tax benefits.

Buying a plot of land is risky - the appreciation may not be significant enough for all the years of 'dead money'.
I started looking around keeping this point of view in mind and I saw a fair number of posts/articles which in a broad sense agreed with real estate not being the best way to put your money to use.

So what do you guys think about this?
Like I said, I'm 27 and I've always had this 'notion' in mind that I need to own a house by the time I'm 30 (financial stability and all) and this, quite honestly has left me so much more confused

 

[m-jeri]

^^

Who said property is not a good investment?

 

[Zinc]

Owning a house is one of the first steps regarding major financial decisions.
The earlier you do it the better.

The house in which you intend to live is never really an investment.
A second house or a plot is an investment.
So if you are looking for a house for living then get one as soon as practically possible and then look for other investments.

Basic classes of investment are :

1. Debt (like bonds, debt funds, ppf, etc)
2. Equity (like stocks, mutual funds, etc)
3. Assets which increase in value (like gold, real estate)

If you have not already done so then do open a ppf account straightaway.
Real estate is still a good investment but you have to diversify your assets.
Also, investing with a loan doesn't make sense like if you want to buy land then as far as possible buy it with cash, you could start small if you want.
Take loan only if you are buying a house or land for living there.


Or you could invest some money first in some other asset like mutual funds and use that money later on to invest in real estate.

 

[MAGNeT]

For real estate...the golden rule is if you personally doesn't own any piece of land to stay,than investing in real estate is best piece of investment(though its not an investment its much of basic necessity).
For return purpose the whole scenario changes.There are many facts one need to consider.
Also you will find many people on this forum who have made monies investing in plots.
But now life is more tougher.
One thing people so far in last 20 years who invested in real estate thinks is that real estate can only give positive returns which isn't true.And now the cycle is changing...

http://www.moneycontrol.com/news/business/why-property-is-biggest-con-jobinvestors_852422.html

 

[red-devil]

Well, my dad owns a house and he works in a different city so I've been living in that house all along.. Now I wanted to buy a house - my initial estimation was 50L and I was speaking with some colleagues about what would be the right approach - you know in a gathering info/research kinda way.. and then this colleague of mine came up with this argument that he had read in some book (IIRC he said Rich Dad Poor Dad - though, I could be wrong about the name of the book) which argued that money invested in a house is pretty much dead money which quite honestly confused me so much more!

Now I don't want to buy a huge plot of land and break it up into smaller chunks and sell it like the 'developers' in Bangalore - All I'm concerned is with is that IF I buy a house with the intention of renting it out for a couple of years and then sell that over to someone else and use that money to buy a different house to live in, will I be making good on my investment - all things considered?
(this assuming I don't want to live in the same house for whatever reason)

OR should I buy a small plot (for say 20-25L) and then keep it for a couple of years and hope it'll be worth 28-30L and use this money for a house?

Either way, all my savings will be going into this house/plot and I wouldn't be sitting on any cash reserve post the purchase...

Hope I've managed to explain where my confusion is/where I seek suggestions on...

 

[m-jeri]

Buy a land in outskirts of city. In 10 or 12 years, you will get at least 5 times what you invested. From experience. No matter what we see, India is developing a bit.

If you are buying a house, renting it out etc. Then i dont know. All the people i see who made money out of it, is the type i told you. Buy a land or house, forget about it. You have no idea of the stupid amount of money someone i know made like this.

Hint - He is a IT laborer like me, though he drives a Q7/5 Series to work. When the GM of that company comes in a Civic.

 

[Zinc]

Well, my dad owns a house and he works in a different city so I've been living in that house all along.. Now I wanted to buy a house - my initial estimation was 50L and I was speaking with some colleagues about what would be the right approach - you know in a gathering info/research kinda way.. and then this colleague of mine came up with this argument that he had read in some book (IIRC he said Rich Dad Poor Dad - though, I could be wrong about the name of the book) which argued that money invested in a house is pretty much dead money which quite honestly confused me so much more!

Now I don't want to buy a huge plot of land and break it up into smaller chunks and sell it like the 'developers' in Bangalore - All I'm concerned is with is that IF I buy a house with the intention of renting it out for a couple of years and then sell that over to someone else and use that money to buy a different house to live in, will I be making good on my investment - all things considered?
(this assuming I don't want to live in the same house for whatever reason)

OR should I buy a small plot (for say 20-25L) and then keep it for a couple of years and hope it'll be worth 28-30L and use this money for a house?

Either way, all my savings will be going into this house/plot and I wouldn't be sitting on any cash reserve post the purchase...

Hope I've managed to explain where my confusion is/where I seek suggestions on...

The point is that for buying the house/plot where are you going to get the money from?
If you are thinking about taking a loan for that then that may or may not be a sensible thing to do.
Two factors that you should consider here are:
1. Return on your proposed investment (here real estate) should be greater than the total cost of the loan.
2. Investment should preferably mature (ie cost of real estate should rise to that level) before the loan is due.

As I said earlier that you should preferably get a house/plot for living first and then think about investing.
And for that you can take a loan and start paying EMIs.

And if you are pondering between renting a house or selling a plot then both have their merits and demerits and are highly area specific so only a local can guide you in that.

Also, everything here depends on the time frame ie when exactly do you want to own a house to move in.
If you want it at the age of 30 then in three years it is difficult to get good assured returns on any kind of investment.

 

[Haste]

A couple of points from personal experience

1) Don't buy a house on loan as you won't be able to get appreciation of the property because of interest being paid on loan repayment.
That although being true logically, is not necessary. This is only true if you take a loan and intend to pay in its full tenure (normally 15-25 years) . Normally, your income increases as you progress in your career, so you can prepay the loan saving a lot on that interest amount. This is especially true nowadays for young people since people get good pay hikes (30-50% even more) when they switch jobs. I don't know which profession you are in, but if you are in IT/computers you also might get overseas opportunities also which can help you prepay bulk of that loan in relatively short period. So I would advise you to not worry too much about the math, just think positively. Heck if you do the Math, some naysayer would be able to convince to you that living on rented accommodation is far better than taking a loan. But that's not true. In worst case, for some reason you are not able to cope up with responsibility of the loan, you can always sell the property to pay the loan back and still possibly earn some money on it (especially true in big cities at good locations where appreciation is high).

2) Having a loan burden on your head keeps you motivated to make most of opportunities that come your way or create opportunities for yourself to earn more/save more, otherwise once people start earning decent they become lazy/start wasting money on unnecessary things. That is, if your focus is on prepaying the loan in shortest period of time.

3) Type of property: Well that depends entirely on you since you might need it for personal use, but for investment purpose smaller properties like 2BHK apartments flats are better since they are easier to rent and sell when needed. Construction linked plans are still better if you don't need a house immediately since for that you might not even have to take a loan or take a minimal amount.

Another couple of things to note:
1) Don't take a loan if you have plans of further study or setting up your own business. Basically if you have any plans that might require to leave your job, then a loan would seriously dampen on those prospects.

2) If you plan to buy a house just to resell it in couple of years and make quick cash on it, you have to pay capital gains tax on the sold amount when you sell it. Earlier people used to take money in black to avoid it, but in bigger cities there is a concept of circle rate now which makes it difficult/reduces benefits to do this now. One way to avoid it, I know is to buy another smaller property from the money you get, keeping some of the amount for yourself. There might be other ways also, which I'm not sure of. But this is something important to note, which most people miss when they invest.

 

[vivek.krishnan]

Firstly, take a loan and buy property. Ensure that you can offset the interest component of the EMI against taxes paid. Even if you have cash reserves, do not use them unless needed ie downpayment, etc. Keep some cash in reserve.

As for what you should buy, I would suggest an apartment.

And as for capital gains tax - you need to ensure that you re invest the amount you get in property or bonds to avoid that tax.

 

[Vince]

First do some financial planning. See that you have some amount as
a) cash reserve as emergency
b) liquid mfs for short-term parking of any income that you receive
c) equity mfs and gold mfs

Red-devil, i'm in a similar state as you are (27, wanting to get a place soon). Except I am looking at Mumbai, which is a devil in its own.

First thing, can you make a downpayment of the 20%?
Can you survive scrimping on your expenses for at least 10-15 years while a bulk of your salary goes into the emi?
Don't you plan on getting hitched in those 10-15 years? So how will your expenses change then?
Do you have enough liquid assets available for emergencies?

Buying for appreciation is risky, if you are getting a cheap deal, there is a reason why it would be cheap : marshy area, mosquito problem, near a dumpyard/industry, etc. So beware.

Buying a 'to-be-constructed' flat entails many issues such as delays, and if you notice, there have been a LOT of delays in completion lately.
Buy as per your ability and needs, not wants.

Beware of manipulative people in Real Estate.
"Sir only 2 flats left in this 20 flat complex. buy quickly" - Bullshit.

Keep a track of the Residential Index: http://www.nhb.org.in/Residex/Data&Graphs.php
As you can see, Bangalore hasn't really appreciated in 6 years.
Chennai has tripled, even with its power cuts.


I suggest you

a) first save up for the 20%.
b) keep an eye out for good real estate deals while doing your due research. See if you can do this along with a friend who is also interested in the same.
c) keep investing a sample emi amount religiously in mutual funds.

By the time you spot a good deal (flat, land), you'll have the downpayment amount, and you'll be mentally prepared to spend an emi.

 

[m-jeri]

@OP... do heed the words of wise one --> @Haste. Gold is what that post is.

Good Advice mate.

 

[sharktale1212]

First do some financial planning. See that you have some amount as
a) cash reserve as emergency
b) liquid mfs for short-term parking of any income that you receive
c) equity mfs and gold mfs

Red-devil, i'm in a similar state as you are (27, wanting to get a place soon). Except I am looking at Mumbai, which is a devil in its own.

First thing, can you make a downpayment of the 20%?
Can you survive scrimping on your expenses for at least 10-15 years while a bulk of your salary goes into the emi?
Don't you plan on getting hitched in those 10-15 years? So how will your expenses change then?
Do you have enough liquid assets available for emergencies?

Buying for appreciation is risky, if you are getting a cheap deal, there is a reason why it would be cheap : marshy area, mosquito problem, near a dumpyard/industry, etc. So beware.

Buying a 'to-be-constructed' flat entails many issues such as delays, and if you notice, there have been a LOT of delays in completion lately.
Buy as per your ability and needs, not wants.

Beware of manipulative people in Real Estate.
"Sir only 2 flats left in this 20 flat complex. buy quickly" - Bullshit.

Keep a track of the Residential Index: http://www.nhb.org.in/Residex/Data&Graphs.php
As you can see, Bangalore hasn't really appreciated in 6 years.
Chennai has tripled, even with its power cuts.


I suggest you

a) first save up for the 20%.
b) keep an eye out for good real estate deals while doing your due research. See if you can do this along with a friend who is also interested in the same.
c) keep investing a sample emi amount religiously in mutual funds.

By the time you spot a good deal (flat, land), you'll have the downpayment amount, and you'll be mentally prepared to spend an emi.

This^
One last thing, dont ever get into something because of advice which says "I know a person who made untold riches by doing xx". I know a lot of people, one who bought Satyam at 10rs and made lakhs just like that. Another one who turned 1lakh into 20lakhs in 6mths when trading forex. another one, who turned $25 into $800,000 in 4 yrs (Inr =50, 1250 into 4 crores!) None of which should be construed as being good investments. Satyam is might not touch 10 in its lifetime, forex trader unnecessarily took risks, somehow made it out alive (lost most of his hair) and you might not be as lucky as him, and the last one, well he was plain lucky (lottery tickets ).

 

[m-jeri]

True what the above post says. Luck plays a alot. And the people i mentioned, they were by no means poor in the start. All are from well off middle class with enough disposable incomes.

Mostly in success stories. There will be a back story to it.

See what you can afford. I am also in the same boat. I am 28 in 2 months. . Planning to get a piece of land for myself. No idea whether i will build a house there. But lets save that for the future. I think I will pray to God and go for it.

 

[red-devil]

Wow! Now that is a whole lot of information to process!

Thanks, guys - I will read through and analyze where I stand and come back with more queries

Also nice to see people in a similar boat like me
@m-jeri - where are you planning to buy land?
@Vince - good luck with buying a house in Bombay

 

[m-jeri]

Trivandrum. My hometown. I need a bit space, I dont like 4 or 5 cents. So will only look for outskirts.

 

[Santa Maria!]

I'm turning 27 soon as well. Voices in the back of my head have been nagging at me to start thinking about stuff like this... long term investments, but I haven't started anything.
There is some good general advice in this thread. I will chew on it.

 

[logistopath]

Personally, I have always felt that real estate is not really a good investment. Definitely not, if that is your only investment, and if you are going to do that by entirely relying on home loans. The property cannot be immediately liquefied to cash. It requires constant maintenance and repairs. There is absolutely no guarantee that the real estate in the area will show an upward trend. You cannot be absolutely sure that you will still live or want to live in the same place in the distant future. In most cases, the EMI paid on the house loan will be much higher than the rent you might be paying if you were to not buy. Sure enough, you will own the property at the end of the tenure, but at what cost? The entire period of your home loan, you will be living worried about changing interest rates, your job security, etc.. In most cases, you will be curtailing your every other expenses and/or investments just because you have a home loan. All this, just because you want to satisfy an emotional decision of owning a property. Take away the emotional factor, and rethink, purely considering the property as any other commodity. Your ideas might change.
As always, there are two sides to a coin. There are also advantages of owning a property, which many other members will write about. I just want you to look at the negative side of it too. Just, don't go in blindly believing that property prices will always be on the rise. That is a myth. India has a huge land reserve to offset any additional demand for living space. This is not a Singapore.

I will most probably buy a property, when:
1. I am able to contribute a considerable amount of cash in down payment.
2. I will be able to finish the home loan in a very small period (may be 10 years maximum).
3. I get a good property (plot or individual house) in a decent tier 2/3 city. Prices in tier 1 cities are too inflated to be within my comfortable reach anyway.

BTW, I believe most of you who have replied here are bachelors. It is very easy to say now that you can save so much and so much, but always think with the future in perspective, when you get married and have kids. Expenses increase logarithmically as the number of members in a family increases.

 

[red-devil]

Personally, I have always felt that real estate is not really a good investment. Definitely not, if that is your only investment, and if you are going to do that by entirely relying on home loans. The property cannot be immediately liquefied to cash. It requires constant maintenance and repairs. There is absolutely no guarantee that the real estate in the area will show an upward trend. You cannot be absolutely sure that you will still live or want to live in the same place in the distant future. In most cases, the EMI paid on the house loan will be much higher than the rent you might be paying if you were to not buy. Sure enough, you will own the property at the end of the tenure, but at what cost? The entire period of your home loan, you will be living worried about changing interest rates, your job security, etc.. In most cases, you will be curtailing your every other expenses and/or investments just because you have a home loan. All this, just because you want to satisfy an emotional decision of owning a property. Take away the emotional factor, and rethink, purely considering the property as any other commodity. Your ideas might change.

This is pretty much what my colleague was talking about as well..

I don't want to generalize but in my case at least, a house/property will be my major investment. Not saying that I'll not invest in something else - I have a bit of NSC and PPF things right now but nothing in the stock markets/MFs/other 'fancy stuff'-- I way I see/saw it is that I'll own a house to live in by the time I'm 40 and by own I mean clear of all loans etc. That's why I'm beginning to put my head towards this - I've got about 12 odd years to hit 40 and I'm looking at a loan repayment span of 10 years (a year/two more is OK I suppose)

About the getting married/having kids - If I can plan my finances now when I'm just starting my career, by the time I get married/have kids, I should have increased my income as well so I'm hoping the increase in income+current savings (=salary-(EMI+my individual expenses)) will offset the family expenses (and have a bit to spare -> scary I know)...

What I feel I'm not factoring in, are my parents -> my dad has 2 more years to go on his service after which he will retire. Then 5-10 years down the line, there will be some medical expenses which might impact all this 'financial planning'..

(and there may be things that I've not even factored in...darn its hard :|)

And thus the research and thus the discussion with my colleague and the confusion and this thread and this discussion now...

 

[m-jeri]

What the above post said is true. But still, if you want and can get some land as investment. Get it.

Hmm. I just read your post. Let me be clear, the property purchase you considering is not a investment. Its more like an asset for you. Do no consider it as a investment and you will be ok.

 

[red-devil]

^ isn't land as an investment a bit risky? You don't enjoy the fruits of your investment (like you don't live there), you may or may not get returns as much as you'd expect and you end up investing a lot of savings into something which has no current returns and is practically 'dead money' until you sell it...

(again, I'm assuming the land is bought with savings and not via a loan - in which case it gets worse)

Edit: just read your post...

I agree its an asset but I guess my confusion is more towards whether the asset value worth the pain/accommodations/sacrifices that invariably will have to be made, thus rendering the whole idea a bit dated?