Category: Real Estate

Real Estate vs. Stock Market Returns: When Stock Market Beats Real Estate Returns

Real Estate vs. Stocks: When Stock Market Beats Real Estate

In the last post I said why I prefer stocks over real estate when it comes to investment. Today’s video is to compare real estate vs. stock market returns. Few months ago, when I visited a relative at his home in Trivandrum, he told me that he bought his property in 1981 for Rs. 10,000 per cent of land, and now it’s valued at Rs. 25 lakhs. So I was like WOW. 250x the investment. Out of curiosity, I calculated its CAGR (…) and I figured out that it comes to around 16%.

So how does it compare with stock market returns?

As you probably know, the base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. Sensex now trades at over 36,000. The CAGR of Sensex over the past 38 years is over 16%. Or 360 times the original investment (compared to 250x). That’s excluding dividend. If dividend is included then the returns could be in excess of 18% CAGR.

So what’s the point? Actually, many!

* Long term effect of equity is least understood in this country.

* When it comes to real estate people uses X times the investment to highlight its returns. Say, I bought a land for 1 lacs and sold it for 5 lacs. And I multiplied the money by 5 times. But when it comes to equity, the returns are expressed in CAGR/ (or Compounded Annual Growth Rate)

* I have also read that equity has outperformed one of the most expensive prime properties in the country.

* Samudra Mahal building was Mumbai’s most expensive building when it was completed in 1970. At that time, bookings had then commenced around Rs 700 per sq ft. And 3 years back (Jan 26, 2015) Infosys co-founder Nandan Nilekani paid about Rs 1.29 lakh per sq ft, or Rs 22.5 crore, for a sea-facing apartment in the marquee Samudra Mahal building at Worli.

* 129,000/700 = 184.285714286 : That is, 184 times in 45 years. Or a CAGR of 12.29%.

* What does that mean? Sensex has delivered superior returns than the most expensive prime property in the country.

* So remember one thing. When you think about equities think 15-20 years and not 5-10 years (as TV channel experts would say).

* A stock’s up trend or down trend could last up to 10 years. Means, a stock can move up or down continuously for 10 years before the cycle turns around. So when you enter a stock at the wrong cycle, you will have to wait two cycles for real returns. That makes 5-10 years short term.

* We buy a property and hold it easily for decades. People do not sell their homes and properties when the demand is low, right? They sell when they need cash. But we don’t do it with equities. When you do, you will agree with Albert Einstein that: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

* I compared the above performance with Sensex, but good quality stocks and mutual funds have delivered better returns than real estate itself.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂


Real Estate vs. Stock Market: Why I Prefer Stocks Over Real Estate

Real Estate vs. Stock Market: Why I Prefer Stocks Over Real Estate

You probably know that Real Estate and Gold are considered as two of the most safest investment options in India. It’s true to some extent. But I personally prefer stocks over real estate when it comes to investment. That said, it’s nice to own a beachside villa or resort or whatever just like we buy car, gadgets, etc. But definitely not as an investment.

Now let me tell you Why I Prefer Stocks Over Real Estate:

1. You need a huge amount of money to invest in real estate. But when it comes to stock market, you can start with whatever money you have.

2. Prime real estate properties are affordable only for the elite class. But you can buy the stocks of any companies with whatever money you have. Very handful of stocks trade above Rs. 10,000 per share. E.g. Bosch @ 18k, Page @ 28k, Eicher @ 28k, MRF @ 75k.

3. Real estate lacks liquidity. You can’t (or you don’t) usually buy a property today and sell it tomorrow that easily. On the flip-side, you can buy and sell stocks any time. Of course the risk factor is different for both. Don’t you hear this often: “Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” That’s it.

4. Also, you can’t partially sell your property that easily. But you can sell a part of your stocks or all of it when need arises.

5. Real estate involves taxes, government offices, documentation, commissions, etc. and that makes buying and selling a hassle. But it’s super easy to buy and sell stocks as there are no paperwork or legal hassles involved.

6. Transaction costs are huge for real estate (in fact, that’s why white money gets converted to black money) but it’s very low for stocks. It’s only 1% including buying and selling side.

7. Even after buying a property, there’s maintenance costs involved. Unless you rent out your property there’s no income. But when it comes to stocks, you actually make money annually as dividends.

8. It’s not possible (or at least not easy) to assess the real value of a property. But you can value a stock based on its earnings and earning potential.

On the flip side, real estate is not a bad option either as it’s got some unique advantages:

1. You can invest in bulk. Of course, you can invest bulk in stocks as well. But the risk-reward may not be favorable. Of course that risk is also there in real estate as well (What if you buy at peak, like housing bubble in U.S.) but not as much as in equity I guess.

2. There is no ticker to show the current market value of a property in real-time. So there are no mark to mark losses and sleepless nights. Actually, you will have some peace of mind that you own this or that property.

3. Unless there’s fraud or something like that there’s no risk of halving of price in a day. Meanwhile, stocks are so volatile that its price can go down to any levels. Best example is Satyam. I think it went down 90% in one day because of a fraud.

These are the reasons why I prefer stocks over real estate. Tell me which one YOU prefer and why.

Video / Malayalam

I hope you have learned a thing or two from my new video. If so, do share my video with your friends and family on your social media channels!

Happy Investing/Trading! 🙂