Real estate investing is a topic that often raises questions and doubts. Many people wonder why it’s important to invest in real estate when other investment options seem more liquid and offer higher returns. In this article, I will address these concerns and provide some key pointers on why real estate should be a part of your investment portfolio.
Diversification and Allocation
One of the main advantages of investing in real estate is diversification. When you invest in real estate, you allocate a significant chunk of your portfolio towards this asset class. Suppose you buy a house with a 25% down payment. Instantly, your exposure to real estate becomes four times your down payment. For example, if you purchase a house for one crore and put down 25 lakhs, you still have 25 lakhs in equity exposure. However, your overall investment portfolio now amounts to 50 lakhs.
This diversification benefits you by spreading your investments across different assets, reducing your risk. By including real estate, you create a balance between different investment vehicles, such as stocks and bonds, which can contribute to a more stable and profitable portfolio.
Diversification and Allocation
Timing the real estate cycle can be challenging, but if you manage to get it right, the rewards can be substantial. Real estate cycles are known for their long and slow nature, allowing for potential gains over several years. Imagine if you purchased a property in an area where the real estate market has been booming for the past few years. In just three years, your real estate investment could see a significant surge, perhaps by 50%, 60%, or even 100%.
Such substantial growth provides an opportunity to leverage your investment. Suppose your investment has grown to 1.25 crores on a leverage of 50 lakhs. With the continued growth of the real estate market, your leverage can increase further, allowing your overall investment corpus to multiply.
Return on Leverage
Real estate investments also allow you to benefit from return on leverage. If you can secure a decent yield, such as 9% or 10% CAGR, while paying 7% or 8% in interest on your home loan, you are effectively gaining leverage. This means that even if your real estate investment generates a 10% return, you are earning a much higher return on your base amount.
Let’s say you invested one crore in real estate and earned a 10% return, which amounts to 10 lakhs. This 10% return is an additional 2% return on your base capital. By utilising leverage, your return potential is amplified, contributing to the overall growth of your investment portfolio.
Stickiness and Peace of Mind
A significant advantage of investing in real estate is the stickiness it brings to your investment strategy. Once you have a home loan, paying the EMI becomes a priority that ensures discipline in your financial planning. The commitment to paying off your loan acts as a motivator and helps you remain focused and disciplined.
Unlike equity markets, where emotional decisions may lead to impulsive actions, real estate investments come with a sense of stability. While you may stop investing in stocks during a market downturn, real estate investments keep you tied to your long-term goals.
Moreover, real estate provides peace of mind. By investing in property, you eliminate the need to constantly analyse market movements and predict future trends. Real estate investments allow you to stay put and focus on other aspects of your life or professional pursuits without worrying about short-term volatility.
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