India has always been in love with real estate. We are ranked 126th in the world when it comes to median wealth per adult, and yet ranked 8th in the world by home ownership rate. Indeed, this disproportionate interest in property is warranted: real estate has historically enabled families to accumulate wealth in a safe and predictable manner. But for the most part, the selection of real estate has largely been an emotional one, with a preference for buying properties in familiar neighborhoods or curation based on hearsay. This has meant that, while property ownership has always been an aspiration, the potential of real estate to enhance one’s investment portfolio has not been fully optimized.
There is a learning curve involved in profiting from real estate, just like there is with stocks. Unlike stocks though, the stakes tend to be higher with real estate, the errors less reversible, and the sources of high-quality information fewer. With this in mind, we have put together the three most common mistakes that investors make when investing in real estate and our suggestions on how even new investors can profit from this highly lucrative sector.
Mistake 1: Looking for liquidity
Real estate by nature is not the most liquid asset class. While there are now an increased variety of investment types within real estate, some of which offer more liquidity like rent-yielding commercial property REITs, these come with reduced returns. Asset sellers offering high-liquidity options are no longer competing with other real estate players to win your money. Instead they are up against other fixed-income options like bank deposits and bonds and can afford to reduce the IRRs they need to offer by as much as 50% and still remain competitive in the financial markets. On the other hand, your money becomes highly valuable to asset sellers who can rely on this capital for a longer period of time, and as a result the returns you get from these less liquid assets are much higher.
Mistake 2: Being impatient for outcomes
Advances in the real estate investment world, like SEBI-registered AIFs, and publicly-traded REITs, have made adding real estate assets to one’s investment portfolio as easy as stocks. However, the underlying real estate market – prices, vacancy rates, rents, new developments – move slowly like a supertanker and not like a speedboat. Investors who expect quick outcomes tend to make suboptimal decisions, such as prematurely exiting an investment that is on the right long-term trajectory. When investing in real estate, it is important to understand that this is one of the largest industries in the world and it inherently moves at a slower speed than the financial markets. It is worth keeping in mind that people need homes to live in and offices to work from, so real estate will eventually do well in the long run in growing cities in spite of temporary downturns in property markets.
Mistake 3: Geographic myopia
Real estate has often been an emotional investment, giving investors the comfort of physically possessing an asset. Additionally there is a false feeling of expertise in one’s own city or locality. This leads to a locally concentrated real estate portfolio, which is an inefficient dynamic especially for such a large asset class. Investors are far more agnostic and practical when it comes to stocks, chasing only the best-performing assets in search of the highest returns without needing to physically inspect, control and own the asset. Given that a small number of disproportionately fast-growing geographies command a large share of potential profits, investors will earn much better returns by letting go of their geographic myopia and selecting the best possible locations for profitability.
Conclusion: Access to high-quality real estate investments is better than ever before. Profiting from property markets is no longer an opaque, specialized, and closed affair. By avoiding these common mistakes, one can substantially increase returns and reduce investor anxiety. When investing in real estate, choose an investment manager that has deep domain expertise in this complex industry to help you eliminate these investing errors and realize the potential of real estate profits.