r2i forum

On this forum and elsewhere, we hear a lot about what a fantastic investment real estate is. It never goes away and one can never be wrong investing in RE.

I have been plagued by this question for a while now. I have been sitting on the fence and seen the RE market (at least in India) take off and almost get out of reach in the last few years.

There are also opportunities in the US in smaller but growing cities where population is growing and real estate continues to do extremely well (Sacramento is one such town, there are many others, I am sure).

The question is, which investment is better: Diversified Funds (Index funds, Mutual Funds with a good Stocks to Debt ratio, etc.) or Real Estate.

One way to analyze this is:
a) Look at the Real Estate growth in one of the growing cities and see the returns over the last 10 years (or less, or more)
b) Compare those returns with those in the market for say, a S&P500.

Has anyone done such an exercise? Or has this been discussed before. Some time back, we had a discussion on Commercial RE versus market where DosaiLvr, Bobus, VRG, Desi and others had contributed. It had several caveats such as taxation of rental returns and development of commercial RE that may not apply to a pure RE investment.

Can people please share their views? How to go about analyzing and can we develop some general observations/ learnings that we can appy to our AAPs? Thanks.

One advantage of RE that comes to mind right away is the leverage. One can get a loan of 80% or more and keep their own investment to a minimum. So long as you get better returns than your loan rate (which you always do), you will always do better. Also, you can spread the love across several RE investments by getting loans. For diversified MFs, one almost always has to put in your own money and its not advised to get a loan and invest as it is too risky.

My views on RE v/s diversified MF:

MF Pros:
- Liquidity: Money can be easily moved around and remains liquid v/s RE you cannot easily get into and come out of every 2-5 yrs. its more of longer term also because of associated costs of stamp duty etc.

RE Pros:
- If you get it right, and if your RE investment does not go against you -- then its like a personal ATM for life. You keep depositing money to it (building equity) and can get money out of it over longer term (by renting it, or by taking loan against it, or with price increases)

I think I would limit my money in RE to upto 2 homes .. one primary home and one secondary home (ya ya.. 2 homes...thats a luxury i know but working towards that). if I have to make more 'investment' in RE then i would look at industries that benefit from that RE growth .. or REIT or RE stocks.

One more point on my 2 RE investments (primary and secondary home) limits:
- You start losing the tax benefits with more than 2 RE investments. like inUS you an have deductions on primary and secondary home.
- Same goes for Indian tax system. If i remember correctly the Rs. amount you can claim deduction under indian tax system is too less compared to the RE price growth india has seen.

So if you go with more RE investments on loan -- and if u taking loan in India and paying 10% interest on big loan amounts -- that goes againt diversification .. aint it? People are having hard time with one home and falling US home prices -- it wud hurt more if you have 3 such RE investments.

Desi,

Excellent thread. I read it yesterday and was almost done with typing my response but somehow lost it so typing again..:-)

You're right "RE has too many variables (location, timing, etc)". I recall from "Commercial RE versus market" thread, Bobus had concluded that Diversified Funds can't be really compared with RE. Well, at least we can make an attempt to come up with some common factors.

I totally agree with the concept that a portfolio should be made up of Diversified Funds (index funds etc..) primarily but in the mean time we should also keep looking for the opportunities which can give much higher return (of course with some risks). Indian RE was one of these opportunities (3-5 yrs back..though still has some steam left) and I call it the opportunity of our lifetime. I wouldn't say, it is merely an investment.

Similar phenomenon was Silicon Valley/ Bay area in the ninties where every Tom, Dick 'n Harry (primarily in the Tech industry) was given an opportunity to make millions. Would this happen again in the US? I doubt it will..at least in our lifetime. Of course, ppl will always have startups and make money but not that way..

Anyway, we can look @ "Real Estate growth in one of the growing cities and see the returns over the last 10 years (or less, or more)".
I think it would be difficult to find numbers for 10 yrs..especially in Indian RE. But 3-5 yrs is more realistic.

If we're doing a plain comparison at present of an RE investment in a growing US City Vs Diversified Funds, I would say both pretty much will give you the same return i.e. 5-10%, let's say for next 10 yrs.
But if you're comparing the returns of Diversified Funds Vs RE investment in a Tier 2/3 city in India , things will look different. Of course it can't be a blind investment, lot of factors need to be taken into consideration which will require time and effort (much less than investing in Diversified Funds).