In India, when a young person begins his working life, the first wish he/she tends to fulfil is to either own a house or invest in it. That’s very mainstream because from many years, a property tends to carry an emotional value along with it.
But with financial literacy pacing up amongst youngsters, they tend to look at other investment avenues such as stocks and mutual funds. The confusion erupts as to what would be your go to investment option.
This is a very debatable topic, as there are many considerations to be taken before making a decision that to related to investments. We’ll look at the positive and negative aspects of investing in real estate and the stock market here.
Positives of Investing in Real Estate
- Passive Income
Rent is what you get from Real Estate. You get rent on a monthly-quarterly-yearly basis. A steady income is being generated from real estate that slowly appreciates over time.
- Value Appreciation
A land’s value never goes to zero. It always increases over time. Also, if there is some infrastructure development happening in your land’s vicinity, the value of land tends to increase rapidly.
- Beats Inflation
Value Appreciation + Rental Income definitely beats inflation.
- A Tangible Asset
A property is always backed by a tangible asset, which is land. Thereby, you can always mortgage the property with a lender (usually a bank) as the land guarantees tangible value.
Negatives of Investing in Real Estate
A major hurdle of investing in real estate is liquidity. During times of emergency, it is difficult to look for a suitable buyer and get the property liquidated. Often, the seller, due to emergency, sells the property at a lower rate that market value.
- Cost of Maintenance
Properties have many costs attached with them such as maintenance charges, taxes, repairs, insurance and more. If your property has no tenants, then you pocket might take a hit in paying these charges.
- No Partial-Selling
If you have bought property in urban areas, you might have to sell your property entirely if you need money. If you need Rs 50 Lakh and you own a property worth Rs 1 Crore, you would either take a loan for the entire amount or sell your property. Result, you are now remaining with excess cash.
- Very Expensive
Buying a property in India is not cheap. You have to pay heavy sums upfront.
- Rental Yield
Rental Yield is the rate or percentage of return you are getting from your rental income. In India, rental yield is about 1-3%. That means, for your property of 10 Lakhs, you would be getting a yearly income of Rs 10k-30k.
Positives of Investing in Stock Markets
- Long Term Wealth Creators
It’s proven that stock markets have been the biggest wealth creators in history. All the top billionaires have equity shareholding in top businesses which increases their net worth.
- Simply Accessible
All you have to do is open a demat account and start buying shares. When you buy shares of a company, you are the owner of the company to the extent of your amount invested. You can invest in any listed company of your choice. Also, you can start investing with as low as Rs. 100.
- Passive Income and Value Appreciation
Companies give a proportion of their profits to their investors as Dividend. As a company grows more profitable, they increase their cash dividends as well. Also, the stock price of the company increases as, there by increasing the value of your portfolio.
Stocks are very liquid in nature. You can either sell a portion of your portfolio or your entire portfolio within seconds during open market hours.
You can invest in different sectors and industries. This will keep your investments safe during tough times.
Negatives of Investing in Stock Markets
- Volatility in Short Term
Stock prices tend to react to daily news in short term. Eventually, quality stocks move upwards in long term due to good business management and healthy fundamentals.
- Vested Emotions
Many people stick to a downgrading stock due to their emotions attached to it. Maybe, it was their first stock which they invested in or for any other reason. As the stock prices moves lower, they buy more shares and eventually stock doesnt move up, therefore, losing their capital.
Stock price of many profitable companies, despite good fundamentals and management, move between a price range. They continue their sideways movement for a many years. Investors of their companies, run out of patience and withdraw their investments. Realizing a few years later that stock price starts moving upwards.
Now, lets see a direct comparison between investing in real estate versus investing in stock market.
|1. Not as liquid as stock markets.
|1. More liquid than Real Estate.
|2. You are buying a tangible asset (land) when investing in real estate.
|2. When you buy shares of a company, you are becoming a part owner of the company.
|3. High cost of accuqisition and maintance.
|3. Lower cost of buying and holding.
|4. Value of land never depriciates.
|4. Stock price may go up or to zero depending upon growth of company.
|5. Rental Yield is between 1-4%.
|5.Dividend Yield can varry from 1-10%.
|6. Low risk is associated with Real Estate.
|6. High risk in short term but low risk in long term.
|7. Requires higher capital to invest.
|7. Requires low capital to invest.
Both, stock markets and real estate provide financial gains in the long term. It depends on one’s approach towards initiating their first investment and planning for the long term. After considering the above points, one can decide from where to begin investing with.
Some surveys have found that youngsters tend to invest in stock markets in their initial stages of investing and then slowly moving towards investing in real estate.
Thank You For Reading!
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for finnute.in in order to promote financial literacy among the general public.