Do you have a special love for an asset class when you choose to invest your money? Do you have a major concentration of your investments in one asset class? If that is the case, can that asset class fulfill majority of your goals? Think about it! If it cannot then why are you investing in it? Remember if your investments cannot ensure you financial freedom, then you do not justify your hard earned money and your dreams.
The Unaccounted Money Challenge
We Indians have a special love for real estate and if given a choice for investing our money, the preferred choice would be real estate. We all know that real estate investments in India comprises of accounted money and unaccounted money. We invest to fulfill our dreams and goals such as retirement, kids’ education, exotic vacation, others etc. But what we miss out is that most of our financial goals cannot be fulfilled by unaccounted money which is one of the components of our real estate investments.
For instance if you want to dispose of a property, chances are that the proceeds you receive might comprise of major chunk of unaccounted money. And the accounted money that you get is just not good enough to fulfill your goals. Hence as a result the unaccounted money again would have to be reinvested in real estate. But the big question is till when would you compromise on your dreams just because your investments cannot allow you to use them the way you want? It seems like you get caught in a vicious circle of Invest-Sell-Invest.
With the changing tax regime and strict regulations in place, use of unaccounted money can no longer be hidden from the taxation authorities.
Asset Rich-Cash Poor
Another big challenge of investing in real estate for your various goals is that it cannot be liquidated in parts. For instance, you want to want send your kids for their higher education and for which you need Rs. 10 Lacs. You have investments to the tune of Rs.1 crore in hand but that’s in real estate. Now to fulfill this need you’ll either have to liquidate the entire property or take a loan or figure out something else. Inspite of having investments worth Rs.1 crore, you cannot do anything to fulfill a need that’s just worth Rs.10 Lacs. That’s how real estate can be troublesome sometimes.
Income vis-à-vis Expense
Often people also prefer real estate because it can be given on rent which can generate recurring income. And investments that can generate recurring income would obviously be a preferred choice for most of us. But would it be ok if this recurring income would be just 1% – 2% p.a. of the entire cost of investments. Yes the rental yields are very low. And if you look at the maintenance cost you would actually find that in most cases you just reach the break even. For instance, you’ve let out a property and after a year or so the tenants vacate it. Now you’ll have to refurbish it in order to give it on rent again. Hence whatever you earn you spend on refurbishing it.
What’s most critical is that the property you invest in for generating rental income may not be yielding rental income all the time. And if you are dependent on this rental income for either day to day living or for other needs, then you may face hiccups when the property is vacant.
People often adore real estate for one major reason – it gives the best returns. But what they miss out is it’s not the real estate that gives the best returns, it’s the compounding which lets it give those returns. As often reiterated compounding does it’s magic only in long run and in real estate it does its magic because we invest in real estate for long term.
It’s compounding which makes your money work for you. Now it’s you who has to decide what you would choose – Comfort (Real Estate) or Financial Freedom (Financial Assets)