13 Jan 2023 • 6 min read
Portfolio diversification is an important aspect of financial planning. It allows you to spread out the investment risk across different asset classes and maximize the return-generating potential of your portfolio.
When it comes to portfolio diversification, there are different types of asset classes that investors choose to invest in. Real estate is one such asset class that can help in diversifying your portfolio.
In crude terms, real estate means any type of property or land. Investing in real estate, thus, means buying and selling property or land with a view to making an overall gain. However, real estate investing does not only mean physical property or pieces of land. There are other modes of real estate investing, too, which involve indirectly trading in property. One such way is REIT or Real Estate Investment Trust.
REITs are pooled investment avenues that collect the investment from multiple investors and then invest the pooled corpus into different types of real estate. With REITs, you can invest in a diversified and professionally managed portfolio of real-estate holdings and that too with a smaller investment amount.
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Now that you know the concept of real estate investing, the next question is whether real estate deserves a place in your portfolio. The answer to the question is relative to your investment needs, and there’s no one universal answer.
That being said, the popularity of real estate investment is gaining traction in recent times. According to a survey conducted by CII for the first six months of the financial year 2022-23 (April 2022 to September 2022), 59% of the participants were strongly inclined towards real estate investments, while 28% preferred equity.
The reason for the increased inclination towards real estate investment is the benefits that the avenue promises. Have a look –
As per reports, the major housing markets in India grew 40% within the first nine months of 2022. Attribute this growth to rising household income or the sturdy demand for owning a home. The fact remains that this growth drives appreciation in the value of real estate.
As such, when you invest in real estate and its value appreciates, you end up making a capital gain.
Real estate investment also has the potential to generate a regular stream of rental income. When you let out your property, you can start earning a steady rental income over the period the property is rented out. This rental inflow helps in supplementing your income, and you also remain the owner of the home, which can yield capital gains when you sell it off at a later date.
Real estate is a potent tool to hedge against inflation because as economic inflation grows, so does the value of the property. Thus, you can get inflation-adjusted returns from real estate investments whether you invest in property or in REITs.
Lastly, real estate investment creates an asset in your portfolio that can be used for estate planning. Moreover, if you need funds, you can mortgage the property and avail yourself of low-cost loans for your financial needs.
While real estate has a lot of benefits as an investment tool, there are some drawbacks too. These are as follows –
One of the major drawbacks of real estate investment is the capital required. Buying physical property or land is not cheap. Lakhs or crores of rupees are required to buy the property. Even if you want to invest in REITs, the minimum investment amount starts from around Rs.50,000 , which might not be feasible for small investors.
Thus, real estate, as an investment, generally appeals to investors who have considerable amounts to spare and invest.
While buying real estate is easy, selling it off can be challenging. You might not find the right buyer for the property when you want to sell it. It involves considerable time and effort to find the right buyer without compromising the value of the property. Thus, in emergencies or otherwise, real estate is not a very liquid investment avenue.
That being said, if you invest in REITs, the liquidity issue is addressed to some extent since you don’t own physical property directly. You can redeem your REIT investment when needed, but you might lose out on the returns.
Real estate investment is more suitable for long-term investments as they can appreciate in value yielding attractive capital gains over time. If you have a short-term investment horizon, real estate might not suit your needs.
If you invest in physical property or land, you need to invest in its maintenance too. This involves time and effort, which might not be possible to devote for all investors. Even in the case of a let-out property, tenant management and property maintenance can prove to be a major concern.
Though real estate usually appreciates with time, the returns are not guaranteed. In a lean market, you might lose out on the returns if you want to sell off the property.
You should weigh the pros and cons of investing in real estate before making a choice. If the investment aligns with your needs and financial plan, you can invest in it. Else, you can explore other avenues and invest per your goals and risk appetite.
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