Real Estate Versus Other Investment Options: Which One Fares Better?
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Loading... - Gloria Vega
- 06 Jul 2022
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Investing in real estate had traditionally been via construction of buildings and putting them out on rent. While most of such investments happened in the residential sector, some individual investors also forayed into commercial buildings through shop floors and small warehouses.
For the average retail investor however, investment options in real estate had not been practical before the introduction of real estate investment trust (REITs) and fractional ownership. Both allow retail investors to invest in commercial real estate that is a way more stable asset than residential properties. What is important to note is that people are becoming increasingly interested in the commercial real estate sector while also having assets like gold, mutual funds, and fixed deposits in their investment portfolios. So, does that mean real estate can be considered a replacement for any of the others, or vice versa? Let us understand in detail.
No matter what the investment is, multiple factors must be considered before parking one’s money into any kind of asset. Be it instruments like stocks, mutual funds (MF), gold, fixed deposits (FD), real estate, and others. Apart from the risk-return matrix involved, investors need to be clear about their investment goals, and the time they can afford to have their money invested in.
What is a Real Estate Investment?
Traditionally, buying a plot of land and holding it till it appreciates in value is the most basic form of investment that most retail investors would be aware of. The better the connectivity to the plot via roads and bus/train routes, the higher the appreciation as time goes by. There are factors like demand and supply and economic activity in the area that contribute to the appreciation of value, but the general rule of thumb stays the same.
There’s only a certain amount of residential and/or commercial land available and it is becoming lesser by the day. The ones that are better connected and closer to other commercial/residential hubs have a higher probability of being in demand and thus, they appreciate faster. As opposed to a vacant plot of land, a constructed building limits the options of the initial investor in certain ways.
The building may not be preferred by a new buyer/tenant due to the way it is constructed or designed, it may not serve the intended purpose of the future buyer/tenant. Irrespective of these factors, real estate once owned, is an asset that rarely faces any major problems. In terms of buildings, maintenance and upkeep are the minimal charges an investor will have to bear.
Through options like REITs and fractional ownership, it becomes much easier for a retail investor to invest in real estate – more specifically, commercial real estate. Why is commercial real estate preferred over residential ones? The long lease durations offer a better chance of appreciation, and since the tenants are businesses, they are typically more stable in their tenancy as compared to residential tenants. Generally commercial real estate include retail, office, warehouse spaces and can have lease durations from five years to 20 years with lock-in periods of two to three years at least. This presents a beautiful opportunity for an investor to be rest assured of the returns received on the asset for a long period of time.
Real Estate Vs Gold
Gold and FDs are both the go-to investment options of the average investor who doesn’t want to get involved in stocks, shares, and the like. With paper gold, it has become even easier for people to invest in gold as and when they like.
In 2010, the value of 24 carat gold for 100 grams was around INR 1,85,000. As of May 5, 2022, the same 100 grams are worth INR 5,12,800. That’s quite an increase in investment over just a decade. But one should also look at the fluctuations that happen in the prices of gold over the last six to seven months.
Incidentally, as a natural resource, gold availability is also reducing by the day, so it is natural for the value to appreciate. What’s not healthy is the amount of volatility that the asset faces due to its demand and supply matrix. With fluctuations happening across mere months, even if one is a long-term investor, it becomes difficult to ascertain what would be the best time to liquidate the asset.
Let’s summarise what investing in gold can mean for you –
- Holding gold does not provide any tax benefits.
- Finding the best price to sell gold might be hard with the returns being cyclical.
- Not everyone is interested in buying gold, even less when it comes to the actual metal, low liquidity.
- Unless investing in paper gold, transparency is low, and ornaments include making charges that cannot be included in the investment amount.
- As an investment, gold’s only potential is the appreciation that it can undergo. There is no other income potential.
- Devaluation of paper currency is one of the reasons gold appreciates in value. This makes any gain very nominal.
- Interestingly, gold deposits more than half a kg can attract income tax under the gold monetization scheme.
Real Estate Vs FDs
Fixed deposits (FDs) are the most basic forms of investing instruments one can get access to early on in their lives. The highest possible interest rates from FDs were somewhere in the 90s with a whopping 13% return for deposits of three years, five years or more. Those days are long gone, and by the basic investment thumb, your real rate of return is the one that you should be paying heed to, not the nominal rate of return that investment schemes mostly advertise. It is a simple calculation using the formula:
Real Rate of Return = (1+Nominal Rate)/(1+Inflation Rate) – 1
As of June 2022, the RBI increased the repo rate by 50 basis points, which is likely to lead many banks to increase their FD rates as well. But will that affect your investments in any major way? The FD rates available as of May 2022 range from 3-6%. Use the calculator and understand if that is the return you want your investments to bring you.
With real estate, in the traditional sense, contracts can be put up that allow for a steady increase in rental rates every year, for residential buildings. For commercial properties, a similar structure is always signed by the tenants. An added advantage of commercial real estate lies in the fact that it will never fall out of purpose.
Residential buildings might be based upon the personal preference of the tenant, but commercial buildings are chosen based on their location and viability of the business. Thus, businesses which lease out commercial property know that they must be present in the area for certain financial, official, logistical advantages.
Real Estate Vs Mutual Funds
As an investment, real estate also carries risk, but market volatility is not one of them. Whereas mutual funds, that operate on stocks and shares, are ridden with a significant amount of market risk. The following table can give you a clear idea of the differences between mutual funds and traditional real estate investments. Read More...
