Confused: Real estate or Mutual funds

POSTED BY sagar ON November 18, 2010 12:03 pm COMMENTS (9)

Dear all

 I am 22 yr old .. govt employee….. Resident of Navi mumbai. I earn around 36 K and I am thinking of investments for after 3-4 yrs. In current scenario when real estate prices are rocketing ,will it be a good idea to invest 15-20 K each month in buying an aprtment as emi? or shall i invest same amount every month in  safe mutual funds.

plz guide me.

9 replies on this article “Confused: Real estate or Mutual funds”

  1. Dineshgadpal says:

    I want to invest 8-10 lakhs in plot (Nagpur,Amravati-mahrashtra). This is good time to invest in land.? Please suggest me.

  2. Dear Sagar, are you living in your own house or rented one? if rented one, where is your own/parental house (I mean which city)?

    Thanks

    Ashal

  3. Dear Shashank, a very well explained write up & no it was not lengthy in fact it increased my thirst to read more from your write ups. 🙂

    Please keep writing more & more.

    Thanks

    Ashal

  4. Ramesh Mangal says:

    A very well explained writeup regarding the principles of real estate.
    Keep writing Shashank. 🙂

  5. shashank kashettiwar says:

    Sagar,
    Your situation is interesting. The dilemma you are facing of where to put your money, whether in MFs or invest in real estate is very curious. I hope my write up would help you to reach a decision! At least it would help you to get a wider perspective on the options available to you.( I will be assuming some facts about you. If these assumptions are otherwise then point them out. I will mould the advice or finetune the recommendations accordingly. )
    You are very young so the marriage thing is much ahead in life. I think you are either staying with your parents in own house or sharing accommodation with friends. So , as such there is no urgent need to own a house of your own with personal funds. I mean, you don’t require the house for ‘consumption’ purpose in a near future. So even if you buy your first house now, it can be considered as an ‘investment’. I wouldn’t have said so for a 28 year old bachelor or a young married person. For such individuals the first house purchase has to be looked from the ‘consumption ‘ angle rather than the ‘investment’ perspective.
    Now that we have taken the second view of the purchase decision, let’s see what you can possibly do with this investment. Actually only one thing can be done with it i.e. renting it out( if keeping it vacant is not a option!). So you will be earning two incomes from this investment. One, the rent as revenue income and second is the capital growth of your investment over a period of time. Now how much is the revenue income and what would be the extent of growth of the capital value in case of a residential property?
    Residential properties are subject to these two cycles: the rental cycle and the capital value cycle. The rents and the capital value are correlated but the movement of rental cycle need not be synchronous with or in tandem with the capital value cycle. In a stable real estate market the gross rents are usually @5% of the capital value. This was the scenario when markets were steady some 5 yrs back. After that the real estate market started booming and the rental value growth rate didn’t keep pace with the capital values and it lagged behind to reach a low of almost 3% of the capital values. When in 2008 the real estate market started sliding down the rentals as a percentage of capital values reached 3.5 to 4%. The 5% stage/point can be considered as the balance seeking point where the various forces affecting prices/rents would be in a fair balance.
    Now how do the capital values vary over a long term in residential property markets?(15 to 20 yrs scale-which is the period over which 1-2 boom and bust cycles would have occurred- and also a typical period from consumption point of view). The CAGR of capital value would be in 10-12% range over a longer term for a resale property. It seems to be a low figure in the background of the recent boom in the immediate past which we have experienced. But this is the reality. (Manish has written in details in one of his article on this topic- if I remember correctly ). Why it happens so? The residential property is not a pure real estate (which is a vacant piece of land). It is a combination of pure real estate and a superstructure built over it. (A flat of 800 sq ft will have an undivided share of land @500 sq ft).The pure real estate is an appreciating asset whereas the superstructure is a depreciating asset over long term. So this combination of appreciating and depreciating assets create a capital growth rate of 10-12% on the initial capital investment. Now in case of a new construction we can consider this rate to be @15% for initial years(3to5 yrs) of the total 15-20 yrs. Later on the rate of appreciation would start dropping down and at the end of period the CAGR would settle @10-12%. Now you may think why I’m giving such a lengthy lecture instead of suggesting you a straightforward solution for your situation. But you would realize that building up this background was necessary to justify the solution I’m going to suggest to you. (Also having/knowing this information would stay with you lifelong and may help you to take proper decisions in the life ahead.)
    Now we shall examine the decision of buying property from 3 angles:
    1) As an investment decision over 3-5 year scale i.e. the property to be sold off at the end of this period and what returns it can fetch over this period your total money invested till that point of time,
    2) The same property to be used as a springboard to aquire even a better/larger one when you become the marriagible age person . So this is kind of locking up , say a particular sq ft area at today’s rates and add on more area later on at future price, when you are further grown career wise and income wise.
    3) If you choose not to invest in the property but go for other forms of investments e.g. MFs or something else then how it should be or what kind of returns would keep you satisfied i.e. drawing similar kind of satisfaction from both of these avenues
    ( I will write on it in next comment. Do let me know how useful you found the write up so far.)

    shashank

    1. Shashank

      Great information from your side , What i liked most was the break up of “Appreaciating part” and “depreciating part” and both together becomes “Appreciataing asset” .

      Manish

    2. Jig says:

      Hello Mr Shashank,
      Your this part is excellent and already commented in other question where you have mentioned about this post.
      I am waiting for your second part. I think many are now a days in same boat. :):)

      My Case is little different as i want to know wheather commerical investment is also described like as u did for residential?

      thanks
      Jig

    3. Vishwas Gupta says:

      Where is the second part of Shashank’s reply?

  6. According to me, if you stay in a rented apartment then it makes sense to buy a place of your own, no matter what the market conditions are. However, if you already have a permanent residence in Mumbai, then you can look at investing the surplus money for 3-4 yrs to build a good corpus.

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