REAL ESTATE

ASSET CLASS

DEFINITION: Real estate is property comprised of land and the buildings on it as well as
the natural resources of the land including uncultivated flora and fauna,
farmed crops and livestock, water and minerals
Five Pros:
You have direct control of your real 1. estate investment.
2. You receive monthly income from tenants.
3. Your investment property is an asset and a fulfills a basic need.
4. You receive tax benefits.
5. Your investment is insured.
Five Cons:
1. Markets can be fickle; you have no guarantees.
2. Most people have to be landlords as well as investors.
3. Securing financing can be tough for pure investments.
4. Cash flow issues can arise when you have vacancies.
You need to know lots of details up front, including mortgages, titles, insurance, negotiation,
finding the right investment property, etc.
You can deduct certain expenses from your income reducing the taxes you owe. The list
includes:
2. You may be able to deduct losses for tax purposes
If your expenses exceed your rental income, you may be able to deduct that loss from any other
sources of income you have. This
could reduce your total tax bill.
3. You get a regular monthly income
Other kinds of investments may pay out less often or income may be less predictable

Caution
You must have a down payment of at least 20% when buying a second or additional property.
And
you'll have high monthly expenses to cover.

Why Equity Funds Don't Beat Real Estate:

Equity funds often do beat real estate, but it is all about behaviour and perception of investors

Too much churn: (1) Even the worst diversified equity fund has delivered a ten-year CAGR of 10 per
cent and the best one is at 20 per cent.
(2) But most people don't make this return in practice because they try too hard to
'time' their equity investments.
(3) When equity markets are booming, they invest large lump sums or start SIPs in
equity funds in the hope of high returns. When equity markets slump, not only do
they struggle to retain the conviction to continue SIPs, they even get tempted to
pull out.
(4) Thus, the investor experience with equity funds tends to be poor because people
view funds as an
opportunistic investment they invest when markets are
peaking and usually exit when markets are low.
(5) If they did the same with real estate, they would make losses. But the truth is that
they usually do the opposite with real estate.
(6) First, you don't try to time your property purchases when prices are zooming. You
buy property when you feel the need. Nor would you rush to dump your property
when the market is in a downturn. If there's a downturn on, investors would wait
to get a better price for it.

Too small to matter: (1) Ask people around you what sums they are investing in equity fund SIPs - you'll
find sums like R1,000, R2,000 or R5,000 being bandied about.
(2) But ask about their home loan EMIs and the big numbers come tumbling out.
They're committing R25,000, R50,000 or even R70,000 on their property
investment, a good portion of their monthly pay cheque.
(3) How can an SIP investment of R5,000 a month match up a R50,000 EMI? If you
invest less, you are bound to make less.

No like-to-like comparison
(1) A final reason why most people believe they've scored big with real estate
but not with equity funds is
that they don't really compare the returns from the
two assets on an annualized basis. If a `1 crore flat appreciates to `5 crore in 15
years, people think it's a fabulous

REASONS WHY REAL ESTATE ARE BETTER THAN STOCKS

1) Higher rate of return. Stocks have historically returned ~8% a year compared to 2-4% for real
estate over the past 60 years. You can also go on margin to boost your returns, however, I dont
recommend this strategy given your brokerage account will force you to liquidate holdings to
come up with cash when things go the other way. Your bank cant force you to come up with
cash or move out so long as you are paying your mortgage.
2) Much more liquid. If you dont like a stock or need immediate cash, you can easily sell your
stock holdings. If you need to cash out of real estate you could potentially take out a home equity
line of credit, but its costly and takes at least a month.
3) Lower transaction costs. Online transaction costs are under $10 a trade no matter how much
you have to buy or sell. The real estate industry is still an oligopoly which still fixes
commissions at a ridiculously high level of 5-6%. You would think the invention of Trulia would
lower transaction costs, but unfortunately theyve done very little to help lower expenses. They
are in cahoots with the National Association of Realtors. This is part of the reason why I dont
fully trust Zillow.
4) Less work. Real estate takes constant managing due to maintenance, conflicts with neighbors,
and tenant rotation. Stocks can literally be left alone forever and pay out dividends to investors.
Without maintenance youre able to focus your attention elsewhere such as spending time with
family, your business, or traveling the world. You can easily pay a mutual fund manager 0.5% a
year to pick stocks for you or hire a financial advisor at 1% a year.

5) More variety. Unless you are super rich, you cant own properties in Honolulu, San Francisco,
Rio, Amsterdam and all the other great cities of the world. With stocks you can not only invest in
different countries, you can also invest in various sectors. A well diversified stock portfolio could
very well be less volatile than a property portfolio.
6) Invest in what you use. One of the most fun aspects about the stock market is that you can
invest in what you use. Lets say you are a huge fan of Apple products, McDonalds
cheeseburgers, and Lululemon yoga pants. You can simply buy AAPL, MCD, and LULU. Its a
great feeling to not only use the products you invest in, but make money off your investments.
7) Tax benefits. Long term capital gains and dividend income are taxed at lower rates than the
top
three W2 income rates (28%, 33%, 35%). If you can build your financial nut large enough so that
the majority of your income comes from dividends, you could lower your marginal tax rate by as
much as 20% or so, depending on the current legislation.
8) Hedging is easier. You can protect your real estate investments through insurance. If disaster
strikes, its often a pain to get your insurance company to pay for damages because the burden is
on you to prove your claim. With stocks, you can easily short stocks or buy inverse ETFs to
protect your portfolio from downside risk.

midnight phone calls about exploding sewage in a bathroom, gas leaks, the possibility of
getting sued for a bad plank on the porch, and a whole host of things that you probably
never even considered. Even if you hire a property manager to take care of your real
estate investments, its still going to require occasional meetings and oversight.
Real estate can cost you money every month if the property is unoccupied. You still have
to pay taxes, maintenance, utilities, insurance, and more, meaning that if you find yourself
with a higher-than-usual vacancy rate due to factors beyond your control, you could
actually have to come up with money each month!
As you learned in The Great Real Estate Myth, the actual value of real estate hardly ever
increases in inflation-adjusted terms (there are exceptions, of course). This is made up for
by the power of leverage. That is, imagine you buy a $300,000 property by putting in
$60,000 of your own money, and borrowing the other $240,000. If inflation goes up 3%
because the government printed more money and now each dollar is worth less, then the
house would go up to $309,000 in value. Your actual value of the house hasnt changed,
just the number of dollars it takes to buy it. Because you only invested $60,000, however,
that represents a return of $9,000 on $60,000. Thats a 15% return. Backing out the 3%
inflation, thats 12% in real gains before factoring in the costs of owning the property. That
is what makes real estate so attractive

Benefits of GST to different sectors:

Cost reduction for manufacturers: As the current tax structure has three layers at the central, state
and city levels, manufacturing units have to shell out a good amount of money to transport their

goods. They end up paying multiple taxes on the transportation. Once GST is rolled out, there
will be a common tax structure and thus, the burden of paying multiple taxes will go away. Such
units will not have a varied tax structure for transportation of their goods to different locations
and will not have to pay each time they transport goods, thus, reducing the overall cost.
Cost reduction for logistics players: Logistics players create a stock transfer between inventory
stocking points within states to avoid this multi-tax scenario. They have a large number of
smaller warehouses at various locations amounting to more than 50 small warehouses in some
cases, which increases the overall cost of logistics. Also, management of such small warehouses
increases the cost and reduces the overall efficiency of the logistics players. With the
implementation of GST, the tax burden will reduce and thus need to have such a fragmented
warehouse system will decrease.
Hub-and-spoke system: Organizers will now be able to explore a different distribution model
such as setting up a mother warehouse and regional distribution hubs, which will be different
than the traditional carrying and forwarding (C&F) distributor-based models currently adopted.
Merger of smaller warehouses and development of new technologies: Many of the smaller
warehouses lack proper infrastructure and facilities. With a new tax structure, the focus would
shift on efficiency rather than tax saving (through the means of smaller warehouses). The smaller
warehouses will merge to form a more efficient warehouse system. The current scenario
prevented use of new technologies as the cost structures in place resulted in margins of less than
5% on a turnover of few million rupees. Also, installing the latest warehouse management
software at multiple warehouses is a costly affair. With implementation of GST, smaller
warehouses will re-align/ merge into more productive and logical locations. Without the tax
burden, automation will give excellent cost benefits.
Increase in organized warehousing sector: As a result of the GST, there will a reduction in
unorganized warehousing. Price charged by the organized sector will reduce the price advantage
that unorganized sector presently enjoys.
Reduction in transit time: The introduction of GST will reduce transit time taken for border
crossings and paper work. The retail industry too will see an indirect impact due to increased
efficiencies in the supply chain. The cost to customer, which is linked to taxation, will go down
as the multiplicity of taxes will no longer apply.
Residential
Currently, in the case of buying an under-construction flat, a home buyer needs to pay both
Service Tax (4.5%) and VAT (1% in Maharashtra, varies from state to state). Additional indirect
taxes are paid by the developer during procurement, which get built into the cost of an apartment.
Stamp Duty (5% in Maharashtra, varies from state to state) which is payable on property
transfers, is not going to be subsumed into the GST.

Real estate investment provides more stability and can also deliver a
continuous income stream, and this is why it attracts more investors.