Many high net worth individuals are stuck on property. And for good reason, too. With 30 per cent plus returns annually, it seems like a gold mine. But like a Madhya Pradesh -based doctor realised, putting all your eggs in one basket or investing the entire investible surplus in real estate can backfire - badly at times.
The doctor's son needed Rs 25 lakh (Rs 2.5 million) for a course in a foreign country. And he waited, in peace, for the property price to rise as he was sure to get buyers. 'Why lose on the incremental benefit by exiting early,' he confessed to a financial planner.
But when he entered the market to sell the property a month before his son's departure, there were no buyers. On paper, he was sitting on property worth Rs 3 crore (Rs 30 million), but in reality, he did not even have Rs 25 lakh of liquidity.
The rise of real estate as an investment option in the past few years has been due to the fall in equity markets and low returns from debt. The only instrument that has given comparable returns is gold.
Whether it is direct or indirect - through private wealth managers - investors have been flocking to real estate. So much so that sometimes the returns from real estate seem unreal. Yet, growth rates of 40-50 per cent annually are being touted. Sometimes, much more.
But going aggressive on only real estate has its pitfalls. The main one is liquidity. Investors are known to buy property in far-flung areas and at particularly high prices because some airport, station, or highway is likely to come up. And invariably, such projects get delayed, sometimes by a good two-five years.
Then, there are financial requirements. If you are purchasing it on loan, there are a number of financial requirements such as high initial down payment, servicing cost on loan and so on. This apart, it is difficult to maintain as there is property tax, property maintenance cost, etc. that pile up.
Should real estate be a part of the portfolio and how much exposure should one have in this asset class? Gaurav Mashruwala , certified financial planner, admits to advising real estate - a second property - as an asset class for portfolio but simply because it is a good hedge against inflation.
So, asset allocation becomes the key for every portfolio. Put money in liquid instruments such as equities, gold and debt that will ensure a steady flow. And when you are comfortable with the liquidity position, go for a second property as investment.
The traditional advice of starting investment early in life does not apply to real estate, as this is a big financial commitment.
"Real estate is not meant for everyone and comes later in life as it requires a lot of cash and so needs to be considered after one is stable in terms of career and savings for non-negotiable goals," says Mashruwala. Sometimes, it may seem like loss of opportunity but then, liquidity is always more important.