Sunday, May 2, 2010

Investing in realty- Is it for me?

Investing in realty- Is it for me?
Real estate is undoubtedly the oldest and most trusted avenue of investment, apart from gold. Look around and you will know this is true. You probably have old relatives who have never heard of (those who have heard, do not trust) insurance, mutual funds or other such ‘modern’ investment instruments. They have probably invested their life long savings in property and gold, and maybe a bank FD.
However in the last few decades we have been exposed to so many ways to grow our wealth multifold, that we ignored these old, trusted modes of investing and growing wealth in favour of more glamorous, high profile ways of getting rich fast and easy.

And we could do no wrong! Powered by personal finance tips from business channels, pink papers and not to forget self-help books, we invested diligently and saw our wealth grow, grow and grow some more.

When I started working in 2004 (the start of the big economic high) the sensex had just touched 8,000 and when I left my first organization at the end of 2007, it had touched 20,000!!!

But that was the ‘beginning of the end’ so to say. To think of the amount of wealth that has been eroded is migraine inducing. We are scared. And we have been rudely reminded of Newton’s ‘Law of Gravity’. What goes up must come down.

Some of the hottest stocks have been reduced to near zero value. And I think that is the problem with such investments. They are after all a form of ‘paper wealth’ and they do carry the risk of being reduced to just that, ‘paper’.

What all of this has done is restore people’s faith in the good old investments. Gold is probably one investment that has gone against the tide and performed exceedingly well.

However, when it comes to real estate, these are tough times. Prices are rationalizing across the board and people are apprehensive of their investment eroding if prices correct further.

I think these fears arise out of ignorance of the nature of realty investments.

Firstly, I strongly believe that real estate should be a long term investment with a horizon of at least 7 years. So, your investment is not affected by market cycles.

Secondly, people should have rational expectations with respect to their real estate investments. Research suggests, over a period of time, real estate has performed better than any other asset class but people seem to have extraordinary expectations when it comes to property. Yes, its true that there are investors who have doubled and tripled their money in a short time from property investments. However, if you don’t, it doesn’t make it a failed investment.

An investment in property offers the best opportunity to leverage your money. This means only part of the investment needs to come from your pocket, the rest can be financed by a bank (infact a large part can be financed by a bank)

Morever, in a dull market you have the option of leasing out the property which will generate regular income till such time that you can exit the investment on your terms.

Last but not the least, property is ‘real’ or concrete wealth….. No matter how bad the times get, the value of your real estate asset will never be wiped out.
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