Investment vs. Consumption in real estate

When it comes to real estate, confusing investment decisions with personal consumption can be extremely damaging financially. Unfortunately most individuals are also highly prone to making this mistake, as my own parents did around 2009-11.

After selling an ancestral land at a large profit in 2007 (quite usual for lands held since 1970s in India, very cheap before India's economy opened up in 1990s), their natural tendency was to reinvest it back into real estate.

The trouble was that they invested in a house that they themselves would like to live in. Instead of say five different properties of ?50 lakhs each, they purchased one house of ?2.5 Cr!

The rental yield (i.e. rent receivable divided by purchase price of a property) is usually 4-5% p.a. for affordable housing, even higher for commercial properties. It's barely 2.5-3% for luxury residential properties!

Furthermore, five properties across different neighbourhoods and property-types (e.g. residential, commercial, retail etc.) significantly diversifies away the risk while not sacrificing returns. One high-value property magnifies liquidity risk as well.

The consequence? The net compounded annual growth on their 'investment' over 15 years is 3.8% (including rentals received, subtracting maintenance & taxes). That is worse than just leaving the cash in a Bank Savings A/C!

I know of several well-to-do individuals in South Delhi who have lived the exact same experience, without realizing it as they have not done the math. My family's decisions, and my ex-post analysis of the results, have given me a brand new perspective into real estate investment as a whole. We have integrated our learnings in developing the business model of SCDND Estates, so that our clients won't have to make the same mistakes we did.