Investment on a house.

It is a standard view in India that real estate is a safe investment. This view can be either justified or countered taking various aspects of the transaction. Thus one has to understand various aspects of the process and decide for oneself.

Recently I was party to a property transaction. I did not have clear understanding of the whole transaction before the transaction. But I could understand some aspects of the process. There are a few aspects to be understood for making an investment in house property.

First the reasons why it is considered a safe investment.

1.      The investment is in a tangible asset, which appears to appreciate in value over time.

2.      Government provides some tax incentives on interest and principal repayment of a home loan

3.      The family can enjoy the asset

4.      Real estate prices are rising beyond expectation in India.

These are true and there are many more arguments which make a real estate purchase a logical buy.

But one should not think that it is a panacea. Also it is not a one size fits all solution. The reasons are as follows.

The asset is tangible, but illiquid. It requires lot of time to liquidate the property, if required. Let me quote an example. My friend was trying to dispose his house for 2 years. He was not successful. He could complete his transaction after 2.5 years after he reduced the price. This brings us to the other related point. It is a problem as to how to value the property. There is no reliable value. Government price is below the market rate and the price suggested by broker is on the optimistic side. One needs to do lot of research to arrive at the right price. Else, the sale/Buy may not take place.

Another unsupported view is that real estate prices keep increasing. They were for a decade or so in the past. Currently he rise is not spectacular and there is no guarantee that the rise will continue.

Tax sops are real and one can use them to one’s advantage. Also, if one is staying in the same house for which he is paying EMI, the payment in EMI can be partly compensate by rent he pays for the accommodation.

Thus one has to consider many aspects before investing in real estate.

However, if one understands the implications, one can utilize real estate to one’s maximum advantage.