Note – This is a guest post by Ajay. He has previously written on this topic (links in later part of the post) and now updates his thoughts on the basis of 2021 data. Ajay has also authored other interesting posts on How He created a corpus of Rs 3.7 Crore in just 10 years. So over to Ajay for this post.
As Real Estate returns-cum-yields and personal experience vary from investor to investor and myself being a Mutual Funds / Equity oriented investor, please do read this post with a pinch of salt.
With Equity Markets at an all-time high and Real Estate not providing any meaningful returns since 2013, many hardcore Real Estate investors are not likely to agree to this follow-up post and its timing.
I once again reiterate that there will be many reasons for investing (or let’s say putting money) in real estate – such as peer pressure, family pressure, social status, etc. and I am not debating the same. This question of whether you should invest in Real Estate (for investment) or Mutual Funds, can only be answered by you and you alone.
And therefore, this article should ideally be read in that spirit.
If you have not read the previous post and follow-up post of 2019, please do read the same and continue to read this for better understanding.
Also, as stated in the earlier post:
- A home is a place to live and it should not be linked to one’s investment strategy. There should not be any second thought about buying your 1st property for self-occupancy whether with or without tax benefits.
- I am aware and acknowledge the fact that being an Equity and Equity Funds oriented investor, my views will tend to be biased towards Equity investments than Real Estate investments.
- The experience and the actual investment returns of Real Estate investors vary from location to location.
So let’s go ahead.
From the previous post (where we left in June 2019 – link), Cost and Returns from Flat is as follows:
Actual Cost of Flat (excl. rent)- Rs 44.40 lakh
Rent Received – Rs 11.36 lakh
Net Amount Paid for Flat – Rs 33.04 lakh
These are real numbers. Real actual numbers.
Rent received in the last 2 years between June 2019 to May 2021 @ 13,000 per month is Rs 3,12,000/-
While my friend could not get a better rent for the property (he got the same 12,000 during the last 2 years), for the sake of calculations and to provide better figures for RE, I have considered rent as Rs 13,000, i.e. a 9% increase in rent from June 2019).
As mentioned in the previous post, in 2019, my friend could not find a single buyer even at Rs 55 lakh. Also, in the last 2 years, he could not find a buyer to meet his price expectations for sale anywhere between Rs 45-50 lakh.
Further, now the property is considered to be 10 years old and buyers are less for 10 year+ properties.
Accordingly, Net Cost Paid for the Flat was Rs 33.04 lakh (by June 2019) and continued to receive Rs 3.12 lakh as rent over the last 2 years.
For the sake of simplifying the comparison, in the above summary, I am not considering other costs associated with RE such as maintenance, insurance, cost of capital, income tax, etc.
Assuming that the rent was collected and invested in the Post Office Recurring Deposit at 7%, the rent would have grown to Rs 335,657.
In Summary, the Capital Cost was 33.04 Lakhs and Cash Generated was 3.36 Lakhs over the last 2 years. Let’s say the property could be sold at 50 Lakhs (which seems impossible), the Total Asset value as of Today is 53.36 Lacs (Property value + Rent Received in last 2 years and invested in Postoffice RD).
Now let us turn towards Mutual Fund:
Summary of the above Mutual Fund investment (from the previous post) is as follows (as of June 2019):
Between June 2019 to May 2021 the value of the above-tabled investment has grown further as follows:
As a RE investor, one may say, this is an unfair comparison, the market is not reflecting the real business situation and markets may fall at any time, and correction is expected.
Okay, let us see the above fund value as of 30th March 2020 (which was the lowest point in this 2 year period):
While the investment value of the investor in MF in this 2 Years period could have been anywhere between Rs 45.94 Lakhs (on the lower side) to Rs 1.17 Crore (on the higher side), for this post let us leave the best and the worst fund and stick to market return provided by the Index Funds.
Investment value in Index Fund went from Rs 67.94 lakh (in June 2019) down to Rs 47.68 lakh (in March 2020) and bounced back to Rs 91.75 lakh (as of 3rd June 2021).
While we could not find a buyer for RE even today for 50 Lakhs for the flat, the lowest point of MF investment value was Rs 47.68 lakh and the current value stands at Rs 91.75 lakh.
Let us say markets are not rational and valuations are unrealistic and you expect a 40% correction in the market from this peak i.e. say to 9,500 on Nifty (I am not sure which way market will move but for this post, let’s say a downside correction of 40%), the value of investment post the 40% correction will still be at Rs 55.05 lakh (which is still better than the RE asset value and add to that the ease of exiting the investment, if you wish to do so).
If one feels the market is overvalued, we always reduce the risk by partly or fully moving out of Equity or sticking to an Asset Allocation or other formulae but that is for another day to discuss.
But who am I to conclude on this?
I leave the above data for the readers to analyze, judge, and conclude from.
By comparing RE and MF returns in the stated investment period, MF shows promising results. Personally, me being an MF-oriented investor, I strongly believe that over the long term (there may be always few exceptions in specific Real Estate investments), the Equity Mutual Funds Are likely to outperform Real Estate by a decent and substantial margin.
Again, in my opinion (and it is mine so you can choose to ignore it), after the purchase of the 1st property for self-use, if there is any surplus cash left to invest, you should invest it as per your asset allocation (which includes debt, equity, gold & real estate). If the asset allocation permits you to invest in real estate, you may very well do it. But if it doesn’t, then you should refrain from investing in it just because it’s what everyone else around you is doing.
Additionally, the post also reflects (see the difference in MF value between funds) the importance of choosing the right equity mutual fund for investment.