Why financial investments should be larger percentage of your portfolio than real estate?

Real estate is a highly illiquid asset. The more expensive it becomes, the harder it is to sell. There are several pieces of real estate that have a high value on paper, but fail to have any bidder, when sold in the market.

Jul 04, 2016 11:07 IST others Ishaan Gupta |

We in India are obsessed with property. As soon as a child gets her or his first job within a few months the parents will start asking questions as to when the first home is going to be purchased? And this is exactly the right question to ask. But after acquiring the primary residence the fervour to buy real estate refuses the die down. In my short span as an investment advisor a vast majority of the people I have spoken to hold a majority of their network outside of the primary residence in real estate. The reasons they state are that financial instruments are not as trustworthy as you cannot see the physical asset. Now the most surprizing bit about this is that most of the people invested in real estate are holding the right to buy the property until it is under construction. In today’s day and age several such assets remain undelivered and people’s capital remains stuck. I strongly believe you should find a fee only investment advisor to get you a good financial asset portfolio.

Reason 1: Liquidity – your money is with you when you need it
Real estate is a highly illiquid asset. The more expensive it becomes the harder it is to sell. There are several pieces of real estate that on paper have a high value but when you go to sell in the market it just doesn’t have a bidder. In such situations several people may remain stuck for months – sometimes even years. On the other hand financial assets such as stocks, bonds or mutual funds typically are far more liquid. If you get the right advice you will never have to worry about the liquidity of such assets. Even in the midst of a market crash there is a price at which you can sell out.

Reason 2: Transaction costs – Sharing too much with the broker?
The real estate market is such that finding a buyer is complicated. Moreover doing the transaction is even more complicated and several points need to be negotiated. This negotiation is typically very difficult (if not impossible) without a broker in the middle. Now as the broker’s role is so critical typically you have to shell out about 2% of transaction cost. In addition the other party pays another 2% to their broker getting the net transaction cost to 4%! Over and above this registration of the property is another massive cost. Compare this to stocks where you can find brokers willing to deal you stocks at 0.1% of transaction cost – some are even free these days.

Reason 3: Complexity of transaction
A real estate transaction typically has a tiered payment structure with negotiated percentages for advance on signing an agreement to sell, some on registration and some on possession. Negotiating these terms and protecting your interest requires lots of legal writing and opinions. If either the buyer or the seller want to pull out the transaction mid-way it makes things very messy. Compare that with opening a browser and clicking buy or sell for a financial asset (either mutual funds or stocks) – which is infinitely easier.

Reason 4: Yield
Some people buy real estate for the rental yield. Imagine if you own an apartment or an office or a shop and you have to rent it out. You need to first advertise and talk to several people on the phone. Then you need to negotiate terms with them and finally you need a lawyer to sign the agreement. Once signed you need to go and get the agreement registered. Then you need to follow-up with the tenant on rent payments. Compare that with automatically receiving dividends into your accounts from both stocks and mutual funds. And, in addition to being simpler, the best part is that many a times the yield on the financial asset may be more.

Reason 5: Returns
Financial assets give better risk adjusted returns versus real estate over the long run. For example the NIFTY over the past 7 years or so has outperformed the NHB real estate average returns by over 50%.
The author is Co-founder & CEO, Wixifi

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