Thursday, July 29, 2010

Property as Investment? Think Again

For most of us in India, our home is our biggest asset and it means a lot. The house you live in gives a sense of comfort and protection, both for you and your family, and it could well embody all your material hopes and dreams. However, let a home be a home and not a place where you have parked your money in the hope of large gains, especially if you don't have a long-term horizon.

 
Firstly, real estate is a tangible asset—which is good: you can touch and feel and know that it's there. But it is an illiquid asset and god forbid if you need money urgently that you have sunk in a property. You can sell stocks in a jiffy and get the money two days later. But property? It could take months to sell.

Second, while buying or selling property—be it a house or a plot of land, there is always a huge transaction cost—such as title investigation charges, transfer charges, stamp duty, brokerage, etc. It can eat up approximately 10% of the value. Then, there are taxes such as property taxes and capital gains.

Third, the price of real estate can go down and stay depressed for a very long time. In Mumbai, prices of properties in the best of locations remained stagnant or even declined between 1992 and 2002, and then shot up. A long wait for profits can shake off the most die-hard believers of any asset class. Real estate has periodically undergone painful corrections in the past, throughout the world. In India, the real-estate boom started in 2004 because foreign investors poured in money, home loan rates were low and people were buying more than one house on loan, as an investment, even if it was a costly affair. Many NRIs have invested in houses in India but this trend is now history. Prices have gone up and then stagnated after a massive decline in 2008.

You should ideally buy property for your own use, so that you can live in it the way you want to, and not as an investment. If at all you intend to buy property for investment, make sure its value will not decline because of extraneous reasons such as being close to a slum or far from civic amenities or transport options. An attractive property will, no doubt, be more expensive, but it will always command a premium and be easier to sell.


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