Aarul Ghosh is a 40-year-old professional who has been taking a serious re-look at his investments while planning for his retirement. Living in a family home in Kolkata, he also owns two rent-yielding apartments in the city. He was taken aback when his financial planner asked him to liquidate the apartments and invest the income in mutual funds.
"They provide me rent every month." Ghosh was initially startled. But, after he did the math and assessed the benefits, he decided to convert his physical assets into financial assets. "Fortunately, the process of sale has turned out to be smooth as both my tenants decided to give the asking price," he says, adding that his wife too has backed his decision.
Even though his decision has made elders in his family nervous, financial planners say it’s a good choice. A rent-yielding property has always been seen as a safe asset as it provides supplementary income, but that’s old thinking, as per investment experts.
"People who rely on fixed deposits and real estate are the laziest of investors. It keeps them from the vast, sophisticated investment options available to them," says Himanshu Pandya, founder of HP Private Wealth Advisory Services.
Rent On The Table
According to Pandya, when not purchased to live in, residential real estate is not a very wise investment. "I haven’t seen many asset classes that have destroyed wealth in the last decade, as residential real estate did. Rental yields have been in the lower single digits. If the idea is to invest in an asset and hold it, Nifty dividend yields are just as good as them," he adds.
Abhishek Kumar, founder and chief investment advisor of SahajMoney, also believes the same. “Rental yields have not been that great and are at around 3–4% depending on the location and demand. At the maximum, they are at around 5%," he says.
Rental yield is the annual rental value of an income-generating asset received annually as a percentage of the property value. Rental housing demand has been rising in the last few years and is at a much better pace than it was before the pandemic.
Bengaluru, according to data by real estate consultant Anarock, has the highest rental yield as of the first quarter of 2024, which is at 4.45%, followed by Mumbai at 4.15%. This is in spite of the double-digit growth seen since the pre-pandemic era.
Residential property also comes with maintenance costs, loss of earnings for a month or two when tenants are in transit, and ageing properties also require extra maintenance — all of which make rental yields slimmer as time progresses.
"Apart from operational issues, encroachments and tenancy laws, which do not allow owners to vacate tenants if troubles arise, are added troubles," notes Kumar.
Risks Of Owning A Rental Home
Ashok Nomula faces a problem similar to Ghosh at the other end of the country. He owns an ancestral property in Secunderabad, which is a five-bedroom bungalow with a lawn and more. The awe factor ends there, as the 20-year-old property comes with security concerns, heavy maintenance costs, and exorbitant water and electricity bills.
The US-returned tech professional has purchased a four-bedroom apartment closer to the IT centre of the city and is in two minds when it comes to either renting out the old property or selling it.
"I am worried that the property prices in this area will go down as Secunderabad is already being dubbed the old city. The home holds memories and was built with blood, sweat and tears, but where are the returns?"
That's the universal dilemma that most investors face. "Property prices can go up or down; there is no way to predict that. But since the corpus of money that goes into real estate is high, most people tend to hold 60–70% of their total net worth in it—that too into a single property, which is very risky," observes Kumar.
The right mix for investing is 10% in residential real estate and the rest in others. "Real estate is also a highly ill-liquid investment. In case of a need, one can easily liquidate a mutual fund, a bond or a stock, but you can't do the same with a home. More so, what if your home is worth Rs 2 crore and you need only Rs 20 lakh? With a financial instrument, you can easily liquidate only what's needed," Kumar adds.
What's Your Home's Networth?
Yet another big difference between real estate and financial instruments is that the actual worth is written on paper. The country might be in the middle of a real estate boom but the actual worth of a property is a function of many things.
"Asset prices boom when supply is constrained and demand is outstripping the supply. If you look at the top 16 cities in India, supply is significantly ahead of demand. Some have 24 months of inventory, and a few others have 40 months of inventory. Gone are the days when it took 10 years to build a home; now high-rises are being built in 24 months, so supply is not an issue," says Pandya.
In most cases, people wear rose-tinted glasses when it comes to valuing their own property. Also, they tend to compare it to a new property that's built close by. "The psychology is that people unanimously overvalue their property. We call it the endowment effect, as it provides them comfort. But when they try selling it, they will realise its actual worth," says Pandya.
On the other hand, with financial instruments, investors will be able to see their exact value and realise all that's visible. For example, if a stock or a bond is worth Rs 13.87 lakh, the exact amount can be received when sold.
As per age-old wisdom, a physical asset that can be seen, felt and enjoyed is considered a safe investment and those on paper (or paperless) are seen as riskier investments. The tables, however, have turned where people are not shying away from advice that putting too much money into one real estate is risky—and choosing a financial investment that's safer and more convenient—with the promise of better returns in the future.
Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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