Asset allocation is a must!
For most people in India – at least in the suburbs of urban India if not in the whole world, real estate is a big portion of the total assets.
Let us think of a person who bought a house in Campa Cola’s land in Worli. He / she may have bought at a high price. Now let us say hypothetically the cost was Rs. 1 crore – and now worth Rs. 5 crores.
Let us also assume that all his other assets put together is worth Rs. 30 lakhs. Let us also assume he has a Home Loan of Rs. 28L which he is repaying over a long period of time.
SUDDENLY tragedy strikes. Your building is declared illegal. Now your networth is Rs. NIL.
Your house has to be demolished. Supreme Court Orders (and you cannot go on appeal)….spine chilling is it not?
Exactly the reason why asset allocation is a MUST.
Bull Bhai
In small Trailer you have shown the whole picture.
Satish
In such situation, will the bank loan be valid? Is the bank liable to payback all the money, since bank also has not done its homework?
param
this is precisely what i point out to many ardent fans of real estate as the only lottery ticket…
many such cases to be considered:
– your tenant leaves the building indicating that the previous tenant who dies now haunts the house. no one wants to rent/buy that place
– someone well linked to “D” has taken up the next door flat & suddenly, the potential buyers have stopped taking your calls
– some political party has decided to take over your house because it was locked up for > 1 month (very common in kolkata)
– the 5 acre STPI nearby that inflated the price turned out to be too small, so all big IT companies have decided to move to the bigger 500 acre campus outside the city & suddenly the appeal based on location is gone for your flat
in all the cases, the hit to net worth for a common man is immense. it is almost impossible to diversify for a common man in this asset class. bottom-line is that this should be considered as an expense to enjoy & pass on (just like jewellery – i rarely see any middle-class lady selling gold to meet a personal/business need).
Saty
I am a regular reader of your blog. Precise and to the point.
The middleclass of todays generation has immense interest in RE investment and that is fuelled by the general perception that the land prices will never come down, it is the safest, it is an asset etc and the property he owns is a reflection of his worth. But RE investment is as risky as it can get and apart from the points you have mentioned, here are a few.
1) Try selling your property and see what it really fetches and compare that with the paper value or “talked” value. The brokers can easily con the potential buyer and the seller. If you are selling in distress, it can be even worse.
2) In my neighbourhood a flat was built with too much fanfare, and after a few days, opp the flat one fella decided to open a mutton shop !!. You can guess what happens to mutton shop facing flats.
3) Unfortunate incidents like a major theft, or a kidnap attempt or a suicide, murder or any such accident in a house,land will damage the rental and the sales mkt for that permanently. Again our good brokers can manipulate.
4) The price appreciation is a matter of luck and not in our hands, Builders promise a mall, IT company , park, school, ring road etc and these are not always a reality. What can sometimes open in a wine shop, bar, koli mutton shop, a big drain or sometimes nothing comes up. No one knows.
Vince
Very good point there Param.