Why Indians have a positive bias towards real estate investing?
It always amazes me the way Indians have a positive bias towards real estate investing. During one of my client’s yearly review google meeting yesterday, I came across the same phenomenon again.
The client had invested around 30% of his portfolio in the peace of land around 5 years back and when I calculated CAGR it came around 10% without the effect of Long term Capital Gains taxes which he would pay once he books the profit.
On asking whether the same investment would further expected to appreciate the way it appreciated in the last 5 years, he said no. So I suggested him to book the profit.
He was hesitant to book the profit. So as his wealth coach, I asked him whether the recent poor performance of his mutual fund portfolio is the reason for his hesitance?
He admitted and said yes.
He had done few mutual fund investments here and there since 2008 before hiring me as his wealth advisor and the same gave decent returns.
When I highlighted decent returns from his infrequent investments into mutual funds, he agreed that returns are good in his equity mutual funds also and agreed to review the booking of profit in his real estate investments.
This led to another challenge, he asked me what to do with Black money that will come from selling real estate?
I have suggested some traditional ways to convert black money into white legally.
The story of real estate investing Positive bias is not limited to one of my clients but for all investors.
The reason for such positive bias towards investing with real estate is that majority of real estate investments are into residential properties and the same are not valued frequently like other investments and are typically sold after 3-4-5 decades as and when required to be sold for various family reasons.
When a residential property is sold after decades of investments, price appreciation in absolute rupee terms looks high and the majority of investor does not understand the power of compounding and can not calculate CAGR they earned from the residential property they sold.
The absolute rupee gains thus create a positive bias for real estate investing as compared to equity/Equity Mutual Funds.
The real question for investors is: How many of you remain invested for 2-3-4 decades in your equity investments?
So as Investors do not remain invested into equity/equity Mutual Funds, they do not have real estate equivalent positive experience of equity investing and thus they are not positively biased for equity investments as compared to real estate investments.
I am not against real estate as an investment class, all I am discussing is Behavioural Biases of Investor so that the same learning may be used by readers to save from such emotional biases.
The point I am trying to make here if you compare equity as an asset class with Real Estate, the historic returns of equity are better than real estate but we could hardly find few investors that have enjoyed the same returns due to their short term behavior.
I would also like to share one of my client’s situation described as ‘Asset Rich, Cash Poor‘.
He is Central Govt Employee and has decent earnings but as 90% of his assets are into Real estate and rest 10% into statutory retirement funds, he is required to borrow money as a personal loan to finance his short term funds requirements.
My Client was eroding wealth as opposed to creating as he was borrowing money at higher interest rates than his portfolio was earning.
Learnings: If an Investor can remain invested for 2-3-4 decades into equity, they can earn far better tax-adjusted returns from equity as compared to Real Estate.
So keep investing into equity and reap the benefit of long term wealth generation while you can diversify your 30-40% of your portfolio into real estate if the remaining portfolio provided for your liquidity requirements.
Caution: While Investing in Real Estate, always consider your Liquidity requirement as real estate is not liquid means you can not sell a portion of your real estate and you may not be able to find buyers as and when you need money.
PS: If you are interested in managing your money/Personal Finance well, I have created an online course for Do-It-Yourself Financial Planning and Wealth Management.
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