Whether investing in a property i.e. real estate investments or investing in equity funds, a better option? When we invest money into any financial tool, the prime focus should lie on its ROI.
The ‘Return on Investment’ is a chief reason for investing in any property, gold, mutual funds, etc. As this would orient to higher returns in the future. Additionally, it will help in capitalizing on wealth for the future.
The purchase, selling, and management of properties constitute an investment in real estate. Be it a commercial or a residential property, both perhaps provide better returns depending on multiple factors. Investors may buy, sell and lease the properties considering their long-term and short-term goals. You can consult a Cube Wealth Coach or download the Cube Wealth App.
In equity investments, the investors invest their money in purchasing a few shares of companies via the stock exchange market. This way, the investor becomes a shareholder of the company and the investors generally receive money in the form of dividends and capital gains earned on those shares.
Let us discuss the two major investment modes that reap fruits in distinct ways.
Real Estate Investments -
Investing in property is a great source of ensuring regular income and at the same time securing an asset for the future. Also, real estate investments are promising enough. Be it any commercial property or residential property, both feed the investor with probable high ROIs.
Criteria such as location, accessibility to other areas of the city, and public places such as schools, hospitals, metro stations, malls, etc., need to be looked into while buying a property. If these conditions are met, real estate becomes a convenient investment source. Additionally, it provides a sense of security and stability.
For instance, the average rent ratio of residential property stays between 3% to 4% annually. Therefore, a rental income of 3Lacs to 4Lacs per year can be generated if the property holds a value of Rs. 1 crore.
On the contrary, the commercial property rent lies between 5% to 6% annually. Hence, for a similar rate of the property, the rental income would range from 5 Lacs to 6 Lacs per year. You can consult a Cube Wealth Coach or download the Cube Wealth App.
Having said that, one needs to understand what’s hidden behind investing in cement and bricks. It's true that any real estate investment would provide a regular income source in the form of rental and lease and a handsome amount in the future at the time of selling. What’s also important is to realize the cost of other expenses.
Maintaining the property annually like painting, and repairs goes under the section of AMC or the Annual Maintenance Cost. At the time of purchasing any property, expenses in the form of registry, and stamp duty have to be borne by the buyer. Additional expenses for interior decoration may also add up to the cost.
Therefore multiple factors need to be kept in mind before investing in any property -
⦁ Liquidity - Purchasing any property requires a hefty amount of cash in hand for multiple transactions.
⦁ Transaction Cost - There are varied charges and costs levied upon the transactions at the time of purchasing any property that needs to be taken care of.
⦁ Capital Requirements- A significant step to consider while considering purchasing any property is the amount of capital investment required for purchasing any residential or commercial property.
⦁ Property Tax - The amount for property tax is also another expense that needs to be considered while purchasing the property.
⦁ Brokerage And Rental Agreement - The document preparation is a little tedious task that adds to the property expenses.
⦁ Painting and other Misc. expenses - Post purchasing, the cost of interior decoration, furnishing, painting, etc. are important expenses that need to be calculated well in advance before purchasing the property.
Equity Investing in India -
The stock market is one of the trending investment modes, globally. In India, it is catching a lot of attention lately. It is the process of buying and holding shares in the stock market and generating investments in the form of dividends, capital gains, etc. Equity funds are aimed at generating high returns.
Here, the money will be saved in different shares of firms listed in the stock market. However, the downside to it is there is no guarantee of the returns earned. This may happen owing to fluctuations in market prices and other significant factors.
The silver lining in equity funds is they usually deliver the highest returns. The general tax returns percentage lies within the range of 10% to 12%. These returns, however, may fluctuate on the basis of market movements and economic conditions.
In the case of equity investments, capital appreciation may take place. The better way to handle equity funds is to reinvest the profits earned into the company shares. This would ensure additional growth with the increased market share. As the company performs and grows, the market price of the stock usually increases as well.
Investment in the stock market also provides diversification of your money. Though there is an added risk to a portfolio, however, there is also the potential for larger gains. In the case of the equity market, the risk is even higher and so are the profits earned.
Similarities between real estate investment and equity investment
⦁ Just like trading shares in the stock exchange, REITs (Real Estate Investment Trusts) also offer trading opportunities to investors.
⦁ Both equity investment and real estate investment help in the portfolio diversification of the investors.
⦁ Dividends are earned in the form of profits in both i.e. equity investments and as well as in REITs.
⦁ In both the cases of equity investment and as well as REITs, the stocks can be purchased either through mutual funds or via exchange-traded funds (ETFs).
⦁ In the case of REITs it is either through Reits mutual funds and Reits exchange-traded funds while in the case of equity funds, it is either through mutual funds or exchange-traded funds.
Differences between investment in Real Estate and Equity Funds
⦁ A real estate investment apart from REITs require a hefty amount to invest in any kind of property (commercial or residential). In the case of equity funds, the investment can be a minimum amount.
⦁ Investing in real estate involves a lot of tedious activities. These may include the property’s annual maintenance, registration process, construction phase, etc. In the case of equity investment, all that’s required is buying the required stocks through the stock exchange platforms.
⦁ Investment in real estate may have a few additional expenses such as payment for stamp duty, registration fees, annual maintenance charges, etc. While equity investments do not bear any such additional charges.
⦁ Real estate may incur regular income via rent. Dividends are earned in the case of equity investments.
Given the pros and cons of both types of investments, it is essential to consider that every investment has its own merits and demerits.
While real estate requires a bigger investment, equity funds can be traded with a much lesser amount.
Equity investment, along with bringing great earning opportunities, also brings greater risk. While housing investment provides a monthly income but also brings huge expenses with it.
Therefore, depending upon the nature and type of the investment, one needs to determine the correct financial mode for his/her savings.
1. Which is a better investment - Equity or Real Estate?
Real estate is a safer investment option than equity investment. Equity investment’s return largely varies on the current market fluctuations and other trends. However, investing in equity mode is easier with minimum investment requirement and more convenient (can be done from home as well) than real estate including lengthy processes of buying the property with a big investment amount along with documentation, registry, maintenance work, etc.
2. What is the difference between investing in real estate and the stock market?
Real estate investment involves investing in tangible assets usually for long-term goals. Stock market investment includes investing money in purchasing shares of various companies listed on the stock market exchange. Unlike real estate, it is a paperless transaction (Demat account-based trading).
3. What are the real estate returns in the past decade?
Based on several reports and surveys, the average real estate return in the past decade is roughly 10 percent. In the case of mutual funds, it is roughly between 12-14%.
4. What are the types of investment?
There are several multifarious investment modes available to consider for your investment portfolio. Mutual funds, gold, real estate, equity, stocks, bonds, ETFs, Fixed Deposits, Provident Funds, Cash and Cash Equivalents, Insurance, Pension Schemes, etc. You can consult a Cube Wealth Coach or download the Cube Wealth App.
5. What is a real estate investment fund?
It is a type of mutual fund where investors can invest in securities that are offered by REITs (Real Estate Investment Trusts). Similar to mutual funds, real estate funds pay out profits in the form of dividends earned through the management, buying, and selling of properties.
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