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Traditionally real estate investing has been done by building buildings and renting them out. While most of these investments take place in the residential sector some individual investors have also ventured into commercial construction through workshops and small warehouses.
However for the average retail investor investment options in real estate were not practical until the introduction of real estate investment trusts (REITs) and fractional ownership. Both allow retail investors to invest in commercial real estate a more stable asset than residential characteristic. It is important to note that there is a growing interest in the commercial real estate sector while also having assets such as gold mutual funds and term deposits in their portfolios. So does this mean that real estate can be considered a substitute for any others or vice versa? Let's take a closer look.
No matter what the investment is there are a number of factors that must be considered before putting money into any asset. Whether it is equity mutual funds (MF) gold time deposits (FD) real estate and other instruments. In addition to the risk-reward matrix involved investors need to be aware of their investment goals and the amount of time they can afford to invest.
What is a Real Estate Investment?
Traditionally buying a piece of land and holding it until it appreciates is the most basic form of investment that most retail investors will be aware of. The better the connectivity to the parcel via road and bus/train routes the higher the appreciation over time. There are factors For example supply and demand and economic activity in the region contribute to appreciation in value but the general rule of thumb remains the same.
There is only a certain amount of residential and/or commercial land available and less and less. Those that are better connected and closer to other commercial/residential centers have a higher probability of demand so they appreciate faster. relative to a Buildings on vacant land limit the initial investor's options in some ways.
Due to the way it was built or designed new buyers/tenants may not like the building and it may not serve the intended purpose of future buyers/tenants. Regardless of these factors once owned real estate is an asset that rarely faces any major problems. in construction Maintenance and upkeep are the minimum expenses an investor must bear.
With options like REITs and fractional ownership retail investors can more easily invest in real estate -- especially commercial real estate. Why is commercial real estate more popular than residential? Long-term leases provide better opportunities for appreciation Because tenants are businesses their leases are generally more stable than residential tenants. Generally commercial real estate includes retail office warehouse space with lease terms ranging from 5 to 20 years and lock-in periods of 2 to 3 years At least. This presents an excellent opportunity for investors to feel comfortable with the returns the asset is earning over a long period of time.
Real Estate Vs Gold
Gold and FDs are both preferred investment options for ordinary investors who don't want to get involved in stocks etc. With paper gold people can more easily invest in gold when they like.
In 2010 100 grams of 24-karat gold was worth about INR 185,000. The same 100 grams of gold is worth INR 512,800 as of May 5 2022. This represents a considerable increase in investment in just ten years. But one should also look at the volatility that has occurred in the price of gold over the past six to seven years months.
By the way as a natural resource the supply of gold is also dwindling so it is natural for the value to appreciate. What is unhealthy is the volatility that an asset faces due to its demand and supply matrix. Volatility occurs in just a few months even when It is difficult for long-term investors to determine the best time to liquidate their assets.
Let's summarize what investing in gold means to you -
- Holding gold does not provide any tax benefits.
- Since returns are cyclical it can be difficult to find the best price to sell gold.
- When it comes to actual metal illiquidity not everyone is interested in buying gold.
- Unless the investment paper gold has low transparency and decorations include fees that cannot be included in the investment amount.
- As an investment gold's only potential is the appreciation it can sustain. No other income potential.
- The devaluation of paper money is one of the reasons why gold appreciates. This makes any gain very nominal.
- Interestingly under the gold monetization scheme deposits of more than half a kilo of gold can attract income tax.
Real Estate Vs FDs
A fixed deposit (FD) is the most basic form of investment vehicle that people can acquire early in their life. The highest rates on FDs were probably somewhere in the 90s with returns of up to 13% on deposits over three years five years or more. Those days are long gone Fundamental Investment Thumb The actual rate of return you should be aware of is not the nominal rate of return that is primarily advertised by the investment plan. Here is a simple calculation using the formula:
Real rate of return = (1+nominal rate)/(1+inflation rate) – 1
The RBI raised the repo rate by 50 basis points until June 2022 which could lead many banks to raise their FD rates as well. But will this affect your investments in any major way? Available FD rates range from 3-6% as of May 2022. Use a calculator and find out if The return you want on your investment.
For real estate in the traditional sense a contract can be signed so that the rent of a residential building increases steadily every year. For commercial properties tenants always sign a similar structure. Another advantage of commercial real estate is: It never loses its purpose.
Residential buildings may be based on the personal preferences of tenants but commercial buildings are chosen based on their location and business viability. So businesses that rent out commercial properties know that they have to have certain financial officers present in the area Logistics advantage.
Real Estate Vs Mutual Funds
There are also risks as an investment in real estate but market volatility is not one of them. And mutual funds that operate on stocks and stocks carry huge market risks. The table below can give you a clear understanding of the difference between mutual funds and traditional funds real estate investment -
Note that many of the problems with traditional real estate investing have been alleviated through REITs and fractional ownership. Fractional ownership platforms and REITs are regulated by SEBI from the 2022 federal budget increasing the transparency of real estate investments. such a model It also greatly reduces the amount of investment making it easier for retail investors to enter the world of real estate investment.
Risk Factor
The risk factor for real estate whether commercial or residential is low. It's a tangible asset with a rent-paying tenant neither of which will disappear overnight. A property can be flipped for multiple purposes and is just one of those things that will always be there. Mutual Funds Can Be Risky A type of fund that makes up the plan you decide to invest in. Equity-focused plans offer the best returns but can also be very volatile.
While funds focused on government bonds offer greater stability at the expense of lower returns -- sometimes lower than those of real estate. As long as the location is selected the real estate risk can be eliminated. In the case of fractional ownership or REITs the groundwork is done To invest in a company you just choose the asset or the time you want to start investing.
Performance
Performance can mean different things to different people. In addition to being an investment option residential real estate allows you to have a roof. Policy changes at the state and national levels can also affect how real estate behaves. The latest announcements in the 2022 Union Budget Despite the fallout from the pandemic commercial real estate in many areas has been boosted by increased focus on real estate and infrastructure.
Returns
Real estate returns are consistent even if they may not be very high. When it comes to commercial real estate the consistency factor plays out well as lease terms can be as long as 20 years. Value for those looking to have passive income streams and long-term investment goals The real estate proposition cannot be ignored.
Liquidity
Most investment decisions have an invisible liquidity constraint. People might not discuss it but it's still on their minds. If you're investing you also want to get your money as soon as you need it. Although mutual funds are easy to liquidate Just like a day to convert into a liquid asset the same is true of real estate. Even with models such as REITs and fractional ownership it is imperative to plan how to exit investments in a timely manner.
Tax Exemption
Both real estate investments and mutual funds can bring you tax exemptions. Mutual funds have a higher tax exemption and why it is the asset class of choice. You can enjoy tax exemption up to INR 150,000 under Section 80C of Income Tax 1961. Indexing can help you save some taxes even if It involves real estate but certainly not on the same level as mutual funds.
What Works and What Does Not
- As an investor your investment goals may differ from others. But you can certainly notice similarities in the portfolios of those around you. Real estate is a classic long-term investment that steadily creates wealth through rental returns and capital appreciate. Compare it with the following before making your choice:
- Term deposits are a low-risk tool and a great way to store money that you won't be using anytime soon but you don't want to put yourself at any risk.Gold's value as an investment option has changed dramatically over the years but there are still some people who guarantee it.
- Mutual funds are generally suitable for those who are looking for short to medium term investments. As mentioned earlier investment options may vary depending on your investment goals. There is no need to replace one tool with another and how much weight do you place on a particular investment Portfolio should matter.
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