Why Real Estate Investment Is Not Always A Good Choice?

Every Indian would relate to this when we say that real estate is considered to be a huge step towards financial independence. But, if we evaluate putting money in financial markets is far better than putting it in real estate. 

The concept of income-generating properties begins to resonate when numerous investors opt to rent out their homes rather than sell them. This could involve purchasing rental properties to imitate their parents' investment strategies or acquiring rental units due to uncertainty about alternative investment options.

Since these kinds of misconceptions are deeply rooted in Indian’s minds, most people follow the idea of investing in real estate without comparing the possibility of better investment opportunities. 

In this article, we are going to burst that bubble by giving so a few reasons why making a real estate investment is not a good choice. 

1. The assumption set across that land prices will always go up 

One of the major reasons why most Indians tend to make real estate investments is that they believe that the prices of land will always go up with time. 

Most of us must have heard this - Since the world’s population is exponentially growing and due to a shortage of land, the price of land will keep growing. 

But, if you closely scrutinize the data, this is not the case. There is a lot of land to accommodate the increasing population. Today, since India is a developing country the land prices are going up but if you pick up any of the developed countries for example Japan or the US, the real estate sector has crashed over the last decade ~ bursting the assumption that land prices will always go up. 

Before that happens, we believe it is the right time to start diversifying your investment. A perfect investment portfolio is something that includes multiple channels of investment. You can learn the art of creating a perfect investment portfolio in our guide on Building an Investment Portfolio: A Step-by-Step Guidance

2. Real estate is an over-performing asset class 

Real estate investment is not very different from Bank FD. Like an Fixed Deposit, real estate investment also is a long-term investment. Similar to FD, real estates also offer 2-5% annual return which is not much if you consider other investment options. 

But the question is - whether real estate is an underperforming investment or not?

To understand that, let us consider a situation. Suppose that you are renting an apartment for Rs.50,000 per month and then you decide to purchase a house worth Rs. 1.5 crores. Let’s break it down to understand your scenario a little better. 

Price of the house = Rs. 1.5 crores 

Down payment =  Rs. 30 lakh

Loan from bank =  1. 2 crores

Interest rate = 8%

Monthly EMI = Rs. 1,03,000

The amount payable to the bank after 20 years = Rs. 2,40,89,474

Interest amount parable to the bank over 20 years = Rs. 1,20,89,474

Now, instead of making this real estate investment, if you put the same amount in the financial market (stocks, mutual funds, P2P lending, and more) you will earn a huge interest over 20 years, even becoming unimaginably financially secure.

3. Missing the opportunity to diversify your portfolio

Another reason why we believe that real estate investment is not better than other types of investments is that it eats up all your money, leaving no room for diversification. Now, even if you manage to diversify your real estate portfolio by purchasing multiple properties either in different states or in the same city, it will be very challenging to manage them. 

On the other hand, when it comes to another type of investment (Stocks, P2P lending, mutual funds, digital gold, etc), you can manage everything on a single platform. Another highlight is that you can easily cash out your investments which is impossible in the case of real estate. 

The Bottom Line

In the end, we would like to break the misconception that real estate is a perfect investment for everyone. We are not saying you should not invest in real estate, but we are saying, it is essential to measure your opportunities. 

Real estate might seen as an attractive investment opportunity but where at one end, it is a high-risk investment on the other it is a low-investment kind of investment, especially when compared to financial markets.