Shalu is a professional, earning a high salary. She has invested a lot in land, an apartment and a house in her native place as she feels real estate is a good investment option. Buying property gives her an emotional high and leaves her feeling content.
Shalu expects her investments to give her good returns over the long term. As she nears 40, Shalu, who is single, believes her assets will take care of her retirement needs.After all, she will earn regular rental income. Is there anything amiss in her plan?
With every rise in the value of the property, Shalu may believe that she is building up her networth, but what she would actually get in hand should she decide to sell the property would be considerably less. A quick sale for sudden needs might result in significant discount in price as compared to the property’s fair value, where the percentage of discount will be directly proportional to the degree of her desperation.
The other disadvantage is the lack of divisibility. In the case of financial investments, she can sell a portion of her assets based on her need, and build it back with time. Property is indivisible. She cannot sell a few rooms of the house if she needs a smaller amount!
Property investments also comes with in-built expenses like taxes, periodic repairs, maintenance fees and charges. She should also allow for periods when the property may remain vacant for want of tenants. Rental yield typically ranges between 1-4% of the investment’s market value. Though in absolute terms she may get an inflation-adjusted cash flow, in relative terms her return can be better with other investments.
Shalu clearly needs to diversify her portfolio. She could create a balance in her portfolio by investing a portion of her earnings into fixed income instruments for regular income, and invest a part into equity (direct or mutual funds) for her retirement corpus. This diversity, where property is not over 50% of her assets, can give her flexibility, liquidity and better returns, compared to an asset portfolio that is heavily loaded with property alone.