With growing inflation, we need our investments to match up the growing cost of goods and services. Gold is considered to be an inflation hedge as it increases in value as inflation increases. Another very popular example is Real Estate that provides an inflation hedge i.e, increases in value over time. For example, if 60 years ago, you had invested in a piece of land in Andheri, Mumbai, you would be a millionaire right now.
Besides inflation hedge, there are various reasons to invest in Real Estate. Investors buying properties look for steady income. Following the previous example, after buying the plot, you decide to build a restaurant on it. It will provide you with a steady income every month. You can also turn it into a commercial space and rent it out, which is another form of steady income. Another reason to invest is “diversification”. Real Estate returns are less connected to prices of stocks or bonds and therefore it can reduce the risk of the overall portfolio.
Given the benefits of investing in Real estate, there are also some shortcomings. Unlike buying shares of a company, buying a property can come at a huge cost which makes it an Illiquid asset. You also need to have a lot of information about the property to determine the fair value. A newbie with no experience stands at a risk of paying more than the actual worth of the property. With commercial real estate properties, economic condition plays a huge role. If the economy is bad, the businesses will not generate profits which will affect the rental market. You can also end up buying a property that has a lot of environmental issues like contaminated water. Buying a property by taking on a loan further increases the financial pressure to pay back.
To conclude, real estate investments act as a bond in terms of a steady income and as stock in terms of capital appreciation. Looking at the whole picture, real estate does add value to the portfolio but one needs to be an expert before investing huge money in it.
Concept: Shivangi Bhatia Editor: Minakshi Todi