Why real estate reigns supreme: The ultimate investment choice for long-term wealth

In today's volatile investment landscape, real estate stands out as a reliable haven for wealth creation. Unlike equities, which can be unpredictable, and gold, which offers modest returns, real estate provides a unique combination of stability, appreciation potential, and tax benefits.

Real Estate vs. Equities: A Comparative Analysis

Real estate's leverage opportunities allow investors to multiply their gains. With a ₹20 lakh investment, investors can secure a home loan of ₹80 lakhs, totaling ₹1 crore in real estate. This enhances profitability and provides a robust hedge against market volatility.

The ability to make substantial investments in real estate, fueled by favorable home loan conditions, means that investors can capture larger absolute gains, harnessing the full potential of their initial capital. This leverage exists only in real estate.

Investing in equities offers potential high returns but comes with its own set of challenges. The equity market typically offers less scope for such high leverage, limiting the scale of investment and consequently the potential gains. This amplified leverage not only enhances the profitability of real estate investments but also provides a robust hedge against market volatility, making it a superior choice in the current economic landscape.

Bigger Investment, Bigger Returns

Commercial real estate typically offers more attractive returns compared to equities, with rental yields averaging around 10% and price appreciation ranging from 5% to 7%. This combination of high rental income and solid capital gains can outperform the returns generally seen in equity markets, providing investors with a more robust and stable income stream along with appreciable asset value growth.

Equities: Do You Actually Get the Equity Returns?

Many people believe that the absence of daily price updates for real estate on apps helps investors avoid the constant noise and fluctuations typical of equity markets. This can encourage a longer-term holding strategy for real estate, allowing investors to benefit from the power of compounding. Unlike equities, where daily price movements can prompt investors to act out of greed or fear—either by cashing in on perceived gains or selling to avoid losses—real estate’s less frequent valuation changes can mitigate these emotional responses. As a result, investors in real estate are more likely to stay invested for the long haul, capturing the full potential of long-term growth. In contrast, the volatility of equity markets often leads investors to make impulsive decisions, such as selling prematurely, which can significantly reduce their overall returns compared to the theoretical potential of equity investments.

The Lure of a Physical Asset

Real estate offers a tangible, physical investment that allows for a comprehensive evaluation process. Investors can visit the property, assess its location, check traffic patterns, review local amenities, and evaluate potential ROI. They can also interact directly with the builder and speak with current residents to gain insights into the living experience. This hands-on approach enables investors to make informed decisions based on personal observations and assessments. In contrast, investing in equities means lacking direct access to the company you’re investing in. This lack of direct engagement can make it challenging to fully gauge the health and potential of the company, leading to a more detached and speculative investment experience.

Historical Investment Performance: A Decade in Review

To illustrate the relative performance of these asset classes, let’s consider a hypothetical investment of ₹10 lakh made ten years ago in stocks, real estate, and even gold:

Stocks: The same ₹10 lakh invested in a diversified equity portfolio would have appreciated to roughly ₹31-35 lakh, given a CAGR of 12-15%. This figure, however, is before accounting for taxes on long-term capital gains, which could reduce the net returns.

Real Estate: An investment of ₹10 lakh in prime real estate would have appreciated to around ₹25-30 lakh, depending on the location and property type. The real estate market has benefited from tax exemptions and incentives, making the net returns even more attractive when compared to equities and gold.

Gold: A ₹10 lakh investment in gold a decade ago would have grown to approximately ₹18 lakh, reflecting a CAGR of about 6-7%. While gold has been a stable asset, it has not outpaced other investment classes significantly.

The Good Part

While equities offer high potential returns, they come with higher tax implications, and gold, though stable, does not match the growth potential of real estate. With favorable tax treatments and solid growth performance, real estate emerges as a compelling choice for investors seeking a balanced and rewarding portfolio.

As we move forward, the strategic advantages of real estate are clear. It offers a robust combination of appreciation potential, tax benefits, and stable returns, making it a valuable component of any diversified investment strategy. For investors looking to optimize their portfolios and capitalize on long-term growth, real estate stands out as a leading contender.

 

Views are personal. The author is CEO & Co-founder of NoBroker.com