Real Estate is NOT real – It is imaginary !!

Huh? But I keep hearing of people who make crores in real estate you say.

Well, my friend, Real Estate “investing” returns is the biggest fraud that has been going around in India for a while. If you take returns, liquidity, transparency or any other yardstick for that matter, real estate or “property” as some of us call it is at the bottom of the asset classes. Do not believe me? Here is my own story to convince you.

The other day, I was having a “chai pe charcha” with my friend who is a small time builder and owns a small construction company. Talk turned to investing and he confidently declared that investing in real estate gives the best returns. I told him that it is just not true. He was adamant that he was true. Then I told him my story.

I bought a flat in 2000 for 15 Lakhs and sold it for 50 lakhs in 2015. He jumped in and declared victory – “see, you got so many fold returns in just 15 years!! Can you imagine any other investment that will turn 15 lakh to 50 lakh in just 15 years?” he asked.

“Hold on,” I said.  “Did you know that it is a lower return than a Bank Fixed Deposit at 8.5% interest?” I asked. In fact, if I had put that 15 lakh in an FD with an interest rate of 8.5% for 15 years, I would have got back around 53 lakhs!!  So my real estate “investment” actually returned less than an FD!!. If we calculate the returns, it turns out to be about 8.34% per annum.

8.34% is not bad you say. The story does not end here. In fact, it gets even worse. 8.34% is still way too high if we consider that I financed my house through a housing loan. I took a 13 lakh loan for a period of 15 years. EMI was Rs 13,185 per month which means that I paid, over 15 years a total of nearly 24 lakh. Add the 2 lakh advance I paid and another 3 lakh I spent sprucing up the house, the amount becomes 29 lakhs. That is a return of 3.7% !! Less than a Savings Bank account returns !! And people say that real estate is a great investment!!

Please note that these are all back of the envelope calculations. Actual figures may vary but the results would be the same. I have not factored in other costs like cost of maintenance of the property etc but you get the drift.

Now, imagine if I had invested the same amount that I paid as EMI (Rs 13185 per month) in say HDFC Equity mutual fund, I told my friend. By January 1st, 2015, that would be worth more than 2 crores. Where is 2 crores and where is 50 Lakhs? Not to mention the fact that the 2 crores will be tax-free in my hands compared to the taxes that I would have to pay for the 50 lakhs I got for my flat.

My friend was getting progressively uncomfortable as I was narrating all this. He put down his chai and whispered to me – “Buddy, keep all these to yourself. If you start educating people like this I will  go out of business soon!!”

Buying real estate – especially a flat or an apartment is the biggest mistake many young earners make. It burdens them with an EMI that they can hardly manage, robs them of investing in other asset classes like equity when they are young and thus deprives them of years of compounding to make them rich. Not just this – in an ever changing job front, it robs them of mobility when they are best placed to be mobile for better opportunities to increase their earnings potential.

For young earners and those who are just starting out working, real estate is the worst form of investment there is.

PS- I chose HDFC Equity for the calculations simply because I was investing in that fund back in the year 2000.

Maintaining a Budget will not make you rich !!

Huh? But almost all the personal finance guys I have read about talk about maintaining a budget as the first step. How can you say that it will not work?

Well, my friend, it has never worked for me and most probably it will not work for you either. Why? Because sticking to a budget requires willpower – and willpower is a very scarce commodity. How many of us have stuck to our new year resolutions? Not very many. Willpower is like a muscle – and just like you get fatigued when you exercise, your mind gets fatigued when you exercise and that is why most of us give up after some time.

Another reason why budgeting almost never works is that it tries to impose scarcity mentality – by trying to limit spending, budgets make you believe that you do not have enough. That weighs on your mind. After some time, your mind craves to say enough is enough!! I want to live!! Let’s go have that ice cream !!

Now, what do we do? If budgeting does not work, what works? How can we be on the path to financial independence (FI)? Will a Spending Plan work instead of a budget? Probably, but not likely.

What we require is a plan that allows us to forget about limiting ourselves to a budget and that allows us to save enough for a bright future. Is there a plan like that? Yes, there is. More about in my next post.