Investing in real estates

This is a write up on my thoughts abour real estate as investment. The real estate implies plot as well as the home.

To describe my disinterest towards RE, first we should see how the system works with respect to RE. To make it clear I’m not talking about REITs.

This is entirely unregulated space. Meaning, there is no check and balance to help the consumers. With no regulations, the black money is very very common. As the transaction is under the regulator’s radar, there is no place to approach for any type of grievances.

There are few reasons that repel me from real estate investing. Those are listed as follows.

Clunky Asset

Most of the other assets can be incremantally acquired/exited and the portfolio get to have a gradual change over time. Even the real asset like Gold can be acquired in grams.

Clunky asset - it requires so much of capital to invest. You could be building your portfolio with proper asset allocation. Yet, with an entry/exit from a property will smack your portfolio down.

Liquidity, bye bye!

The MF can be transacted in units, so does bonds or stocks. But RE cannot be sold in smaller units. Dividing a RE property into smaller units doesn’t make sense. With such an illiquid asset, it is tough to enter or exit from them.

Pattu from freefincal says, once our net worth has grown much higher than the emergency fund, our entire net worth becomes the emergency fund!. But that doesn’t apply to real estate. The illiquidity might become a headache for the dependents, to sell it off and get some cash for survival, after breadwinner’s demise.

Tracking, no way.

As this is an unregulated space, no one knows the true value of a piece of land. The value is decided by the middleman, who is usually more harmful than an American car salesman.

The value of a piece of land is assumed to be based on its surroundings. Want to know the value of your land? Check how much land is sold for in the vicinity.

The guy who sold his land might be under debt stress or have gotten a hold of a fool who can pay him well. We don’t know the actual reason; we assume our land value is closer to the sales price.

Less supply; more demand

The land is limited by geography. But each one of us is brought up dreaming of owning a home. With the rise in disposable income, the share market is being embraced by the bulls. In India, hardly a few people invest in the market. The rest of them are skeptical about the stock market and can’t question them considering the number of scams that came to light. Also, it’s a personal decision. We have no right to question their decision.

However, if we rule out equities, real estate becomes a go-to place. With the huge crowd vying to grab their own piece of land, the owner of Deep Purse gets into the play.

The real estate developer’s modus operandi is simple.

1. Go to the outskirts of the city; the less known the locality, the better the returns.
2. Acquire a large piece of land from the debt-stricken locals. The country is not getting developed evenly. So, every big town has some underdeveloped outskirts. Dangling money in front of locals will lead to a network effect, and you eventually get to have quite a big property.
3. Now, pay for social media influencers, install some banners, and come up with catchy phrases to kindle the people who are already feeling the heat from peer pressure.
4. With approvals from government bodies, you’re now well placed to get the returns for your capital investments.

Every transaction has a winner and loser. As this is seller’s market, you’re getting into one-sided transaction. It’s like casino, the house always wins.

Where is the greater fool?

Investment, when striped down, is a very simple process. Buy something (could be stock, gold, artwork, or a piece of land), hold it for some time, and then sell it for a profit. In a sense, investment is not far from a trader. The trader sells the commodity he owns for a profit and pockets his gain. Repeats the whole process.

Let’s assume you bought a plot. Considering the fact that you have overpaid the seller (remember, you made the transaction in the seller’s market), your only hope is to find a buyer who can give you some profit. The assumption here is to find a buyer for your plot. If the market sustains and the seller’s market prevails, with some luck, you would score a lottery.

Blindly buying a plot in the hope of price to go further up is a textbook example of greater fool theory.

Always remember, hope is not a strategy.

Cost of Emotion

The real estate is something real you can touch - like gold, house or land. Financial assets are abstract - stocks, debts.

We are all biased. Everything that we own gives us,

• a feeling of pride,
• a nostalgia about a person, event

With such an emotion in place, will we sell our priced holdings? We do sell, eventually, when there are no other options. But when you sell something in a desperation that becomes a buyer’s market, you can’t demand the price.

Every asset goes through a cycle.

• Price go up
• Every Tom, Dick and Harry gets attracted to it
• Price became too high to buy
• People starts selling it away
• The price comes down and attract another set of buyers

The asset cycle may look obvious. But the amount of time it takes to move from one stage to another is where the winner or the loser is decided.

If you fail to sell away the asset at right time, lets say due to emotion (or any other dumb reason) it turns out to be dead asset, at least till the next cycle comes up.

• How long will you be able to hold on to dead asset?
• How long can you hold yourself from indulging in fire sale?

Selling away something for loss, for whatever reason, cannot be an investment.

Things we own, owns us.

Investment a journey; Real estate is a vehicle

Investment is a journey. Real estate is one of the many vehicles. Equity, debt, gold/commodities, and crypto coins (yep!) are all some of the other vehicles. Which vehicle suits the journey varies by people, situation, risk appetite, and so on.

As Morgan Housel said, personal finance is more personal than finance. Whatever you choose, give returns, either positively or negatively. So, I’m not here to decide for anyone, but to share what my thoughts are.

See also

• Event Update: M2W Conclave 2.0