Many of us Buy a Home to put a shelter over our heads…….but only a few realise that real estate is an excellent way to save for the future.
Most of us save money for the future through depositing money in a Bank or Company Fixed Deposit while others invest in gold. Several others invest in a home / real estate while a few adventurous types (really very few!) invest in a business or buy shares of companies (in effect investing in the underlying business)
Historical evidence has shown that over a long period of time (25- 30 years) the cumulative wealth of those who invested in real estateand those who invested in a good business ( or bought shares of good businesses), multiplied several fold compared to the rest. Just look at the Raheja’s , Hiranandani’s , Birla’s, Tata’s and the Ambani’s for validation. Both real estate and business investments gave returns to the investor that were much higher than the rate of increase in prices of goods and therefore multiplied wealth.
You have often heard people say "A Rupee today can buy goods worth only Ten Paisa 20 years ago". In India, studies over the last 20 years show that returns given by investments in Fixed deposits and gold are so low that we can buy less goods with this wealth Today than we could have with the original investment. (in effect your wealth has eroded by investing in them).
In India, historical evidence also shows that both real estate and shares have given compounded return of over 20% p.a. over a 15-20 year holding period. Fixed Deposits and investments in gold have given returns of 5-8% p.a over the last 20 years while prices of goods have risen at over 10% p.a in the same period. Only the former was actually adding wealth (as measured by your ability to buy more goods in the future than you can today).
If you carefully choose the location of your property, you can be a multi - millionaire when you retire at 65!. Remember that land is a limited commodity (there is only so much of it that you can buy!). If you happen to buy land in a fast growing location, you can be sure that the price of this land will be bid up over time. Land in Bombay has appreciated in value far in excess of that in pune instead of land in Patna, you would have had at least 5 Mercedes Benz cars parked around your palace Today. There are several instances of people who start Investing in a Home with a small investment of Rs.3-5 lacs. Having chosen the home wisely, they are in a position to sell the home after a few years at over Rs. 15 lacs and then buy a new home at another strategic location. This "trading" continues to compound wealth at an ever increasing rate.
An example……
Assume that you are 30 years old today and you have invested Rs. 5 lacs in a home. If real estate prices move up in line with the long term average rate of about 20% p,a compounded, then at the age of 60 you will have …….…….now hold your breath…….Rs. 12 crores. However, prices of goods will also move up in this period (say at the rate of 10% p.a). You would still have added to your NET Wealth as you can now buy an equivalent of Rs. 68 lacs worth of goods (at the higher prices) with the money.