Why is excess investment in real estate not the best choice?

Manisha Kumar is stuck with her investments. She is in her early 40s and works for a bank. The lure of getting loans easily and at good rates has led her to invest in not one or two, but three houses. She lives in a flat with her family, and has also invested in a smaller flat. A few years ago, she booked another flat in the outskirts of the city. It is the third flat that is causing her heartburn now, as it is lying vacant and earning no income. Should she sell it?

Kumar should know that too much of something can be bad in the long run. Property is not the best investment option, since it involves large amounts of money and comes with the risk of time and cost overruns. Paying too much EMI will also leave too little for building other assets that can diversify the portfolio. The only advantage Manisha has is her age. If she gives herself the next 10 years to rebuild her wealth, she will be able to recoup the cost of selling the third flat at a loss. She will be able to recoup the cost of selling the third flat at a loss. She will also be able to unlock the money that is sunk in the flat, and deploy it in financial assets like equity, which have the potential of appreciating over the long run. Freedom from EMIs will also enable her to start SIPs to augment her savings.

Liquidating an asset at a loss is a tough choice to make, especially when ideas about recovery are ever present.  Kumar should only focus on the fact that the asset is not earning anything for her, and that it might prove to be difficult to sell in parts, if the need arises. In the interest of higher financial flexibility, access when needed, ability to take a loan against the asset during an emergency, and ease of transacting for a fair price, she should liquidate at a loss and channel her money into other assets. The presence of a black market, and the legal and tax issues involved, and the paperwork, make real estate a sub-optimal choice, especially for someone like Kumar, who already owns two properties.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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