3 Times – Where Emotion Mostly Beats Logic – Part 1

We all know and agree that to create wealth, we need a sane and logical mind above everything else. If we let our prejudice and emotions take over our rationality – that will most probably not turn out well for our wealth journey. Still, we see such mistakes happening in and around us. This may have something to do with our financial background, upbringing, tradition and peer pressure.

Buying property as an investment

This excludes buying the first property or the primary property to reside, though it can be proved, that most of the time, taking a property on rent near to your work location makes more financial sense than buying a property far away. This is even more true for those who already reside in their ancestral home there or for those who have come to a different city for work and not going to stay there forever. Still, even such people, on drop of a hat, go for buying a property right out as their first big investment(?).

Then there are those who buy second or third property for investment purpose. Such properties are also often bought on loan. Paying interest often outweigh the tax benefit that they enjoy. Also, for making any investment decisions – we must first consider 3 topmost priorities – return expected, liquidity and convenience (or maintenance). How property as an investment, scores in these 3 metrics?

Return expected – Barring few exceptions, average return from property investment ranges between 8 – 10%. Holding period varies a lot, but mostly not less than 5 years. Thus, this question arises in logical mind – don’t we have investment product which gives similar return in the same period with much better regulation, choices, transparency and liquidity? Net return from property also must consider interest payment, maintenance cost, brokerage cost, capital gain tax and so on.

Liquidity – This is almost a no brainer to categorize property as a highly illiquid product. Selling a property can never be planned on exact terms. There are so many moving parts. The process of finding a buyer, the legal works involved, the terms and delivery of payment – all these take their sweet time to complete. Also, you cannot part-sell a property, right?

Convenience – First limitation comes here from geographical boundaries. May be in some corner of the country, property prices are set to rise in big terms. But can we buy and maintain such property there sitting at the convenience of our home? No. How many of us ever bother to find the right price or intrinsic value of a property based on different parameters? Almost none of us. Can we find such analysis done by some experts for the selected property? Again, the answer is no. Can we buy / sell property completely online? Of course not. Can we be completely sure of all paperwork and legal formalities done as required by the builder / developer? We all know the answer.

So, on the above 3 metrics, property as an investment does not score well. This is by no means saying that property as an asset class is not good to invest. If you are a seasoned property investor, this may be the right choice for you. But is this the right choice for long-term investment for all of us? Is it worth taking the plunge? Do we have better options out there? How about giving that a rational thought – keeping emotion and peer pressure out of the way?

To be continued…