Follow up on thoughts on real estate performance

06 Jul 2022

The question to ask when investing in real estate: Is the property yield greater than inflation?

Yield = ((Rent – interest - maintenance)/Total cost)%

If yield -ve, the price has to go up by at least 10% per yr to beat inflation, or the price has to double every ~7 years.

For the price of the property to double every 7 yrs, the rents also have to go up as much. Not happening in most places in India.

For eg, if a flat costing Rs 1cr can be rented at Rs 20k/month. For the price to go to Rs 2 cr, ideally rent has to go to Rs 40k/month as well.

Of course, like stocks, real estate prices can also go up without good fundamentals. Usually when that happens, stocks, real estate, crypto, etc., prices don’t stay up there for too long. For real estate, rental yields are probably the best measure of fundamentals.

Real estate is illiquid, just like private market valuations. Real price vs last transacted price that sellers claim could be way off.

The other risk is since the price is fixed & paid upfront, you can’t take advantage of price fluctuations through a SIP as in Stocks or MF.

Of course, buying where prices haven’t already appreciated (in tiers 2 & 3, outskirts of a metro) can mean good ROI. But this is like buying a small-cap stock hoping it becomes large-cap, only a few do. It is a high-risk strategy & hence capital allocation should be lower.

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