Why invest in Real Estate -10 killer reasons

You have accumulated some cash and are looking to park it in an investment vehicle which gives you good returns. Depending on your risk appetite, you have various options that include stocks, mutual funds, provident funds, bank saving schemes, gold, commodities, and of course real estate. There are pros and cons of each investment option, but since we are here to learn about real estate, I will focus on that alone.

But why invest in real estate?

Before I tell you the benefits of real estate, I must tell you clearly that all these benefits are for landlords and not for tenants. Life is not fair. Believe me, in the long run tenants will always be at the receiving end and not on the benefiting side. If you are currently staying in a rented house, I hope this article will motivate you to start taking real estate seriously and encourage you to invest in a property, however small it may be.

Here are top 10 reasons, that answers the question – why invest in real estate:

1. Capital Appreciation

Though every investment class has its own cycles of troughs and crests, history has shown that over long term real estate prices always go up. In a developing economy like India, real estate has given superior returns in the past and shall continue to do so in coming years. In fact, real estate markets in many areas have beaten much riskier equity markets. Those who know rules of the game tend to make much higher profits from real estate.

2. Attractive and Stable Income Return

A key feature of real estate investment is the significant proportion of total return, accruing from rental income over the long term. This helps reduce volatility as investments that rely more on income return, tend to be less volatile than those that rely more on capital value return.

3. Inflation Hedging

The inflation hedging capability of real estate stems from the positive relationship between GDP growth and demand for real estate. As economies grow and develop, added pressure is put on rental properties. This causes rental prices to increase, which will ultimately increase your revenue. Rents usually increase with inflation, while loan payments on the property remain stable. So, inflation actually helps landlords in increasing their monthly cash flows.

4. Tax Benefits

If you take a home loan to purchase your property, you can claim tax deductions on both principal and interest payments of your home loan. The principal payment portion can be claimed under section 80C of Income Tax Act and interest payment can be claimed as a deduction under section 24. Government doesn’t give such huge tax benefits on any other investment. In fact, if you have taken a joint loan with your spouse, both of you can claim tax deductions. Should we not call it a “killer income tax strategy” or rather “income tax killer strategy”?

why-invest-in-real-estate

Why Invest in Real Estate?

5. Leverage

Another great benefit of a real estate investment is the power to use somebody else’s money to increase your personal returns. Since real estate is a tangible asset, banks are always eager to provide you a home loan or loan against property. Using Rs. 50 lacs to purchase three properties with down payments, instead of one for Rs. 50 lacs cash, can greatly increase returns. But remember that debt is the single most determining factor in both rise and fall of entrepreneurs and corporations. So you must do your calculations right before you leverage.

6. Lower Risk

Compared to paper assets such as stocks, bonds & mutual funds, real estate carries much lower risk. Even in a downward market your capital will not become zero whereas your investments in paper assets can vanish overnight.

7. High Control

Unlike stocks, bonds and mutual funds, an investment in real estate is backed by a high level of brick and mortar. This helps reduce the principal-agent conflict, or the extent to which the interest of the investor is dependent on the integrity and competence of managers and debtors. In real estate, you have direct control over your asset for example you can renovate it, take a loan against it, have proper insurance, control your tenants, decide when to buy or sell and all returns will accrue directly to you.

8. Financial Freedom

Many of us want to retire early but not at the cost of our lifestyle. To maintain our lifestyle, we need monthly cash flow. Most paper assets do not produce positive monthly cash flow. However, in real estate investment, you get rent every month which also takes care of the inflation and your capital is also protected. If you carefully plan your investments, Real Estate can give you financial freedom much early in life. The best part of a real estate investment is that you can do it as a business alongside your job and nobody questions it, not even your employer. Your job can pay your bills and help you get that loan to buy your property.

9. Portfolio Diversification

Another benefit of investing in real estate is its diversification potential. The addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.

10. Stability and Peace of Mind

Buying a home should be the first priority of any individual. Your home will not only give you stability and peace of mind but also make you emotionally much stronger to take higher risks in life. Once, you clear the loan of your first home, you may decide to go for second property and so on. It feels great to be called a landlord and collect rental income every month without having to put hours of work everyday.

Hope you enjoyed this post on Why invest in Real Estate – 10 killer reasons

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Do you invest in Real Estate? Have I missed any major benefit of real estate investment? Please share your experience and leave your comments below.

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About Mukul Malik

Mukul Malik is the founder and editor of AssetYogi.com. He is passionate about Real Estate, Personal Finance, and Digital Marketing. He believes that Asset Creation is Wealth Creation in Auto Mode and likes to help others create Real Assets with knowledge and research. Connect with him on Google+.

10 comments

  1. Very nicely written article, Mukul. I’m impressed. Inflation hedging in particular isn’t something that most people cover in these sorts of articles. Good for you for bringing it up for people to think about!

    • Thanks for dropping by Jimmy and sharing your thoughts.
      Agree with you on inflation hedging. Not many people consider this while planning investments.

  2. Great share. investing in real estate is prove to be economically beneficial as the real estate sector is growing at an impressive rate in India. All points given by you are well described and I am completely agree with you.

  3. Very insightful. Grateful for your views on following:

    New projects vs rtm property
    Home loan financed buying while keeping ur savings in NRE FD vs self financed buying

    Thanks

  4. Dear Mukul,

    This is an excellent website and I am a regular reader of the articles on this website.

    I am surprised you haven’t yet uploaded any article regarding the DDA flats opened up recently. I and my husband are waiting for your review of the ongoing offer for sale so that we can take a conscious call. Information is available everywhere, but the pros & cons and financial analysis is what we are looking for. For eg., the price of the property, which areas are more VFM in the long run, what should be our strategy from an investor’s point of view and also the negatives of keeping the registration/booking amount invested for a substantial time and not being allotted a property at all!

    Do write. Thanks.

    Shalini

  5. Wonderful killer article for decision making….

    I am a fan of this website as it gives a lot of insight regarding real estate investments (and maintenance).

    In case of a joint loan with wife, can you please specify whether both of us can claim the entire loan individually or together?

    • Hi Ajay!

      Thanks for your comment.
      I guess you are asking about claiming tax benefits on joint home loan.

      Husband and wife can claim tax benefits under section 80C (principal amount) and section 24 (interest amount) of IT Act in the proportionate share of loan amount/ property ownership. Generally, the proportionate share is not specified between spouses. In that case, to keep things simple, husband and wife can claim 50% each of both principal and interest.

      Hope I have answered your question. Will also write a detailed post on this later.

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