Why the Rich Invest in Real Estate: A Smart Wealth-Building

Discover why real estate is a valuable investment choice for the wealthy. Learn how timing, location, and property type are vital in maximizing returns. Find expert tips for smart property investments to become Wealthy!

In today's thriving investment landscape, real estate remains a coveted asset class for the rich and savvy. While the stock market garners much attention, wealthy individuals, including business magnates, start-up founders, and seasoned money managers, continue to invest in prime properties, extensive land holdings, and charming farmhouses. This article focuses on the reasons behind rich-class real estate investments, providing an analysis of the prime times, kinds of properties, and tactics that make real estate an appealing option for building wealth, which helps us understand and learn the Art.  

Timing the Cycle

It's important to note that comparing real estate returns to stock market gains can be misleading due to the cyclic nature of both markets. The property market, just like its stock counterpart, goes through phases of highs and lows. In recent years, India's real estate market experienced a downturn from 2014 to 2020, adversely affecting returns.

According to data from property consultant Anarock, new home sales in the top seven cities have significantly declined during this period, primarily due to factors like demonetization and regulatory changes. However, since 2020, the market has been showing signs of recovery, resulting in a revival of property prices. This emphasizes timing your property purchase during market lows, much like strategic stock investments.

Plots vs. Apartments

Real estate moguls often stress the significance of location in property investments. Unlike the stock market, where trends exhibit some homogeneity, property prices can vary widely based on micro-market dynamics. If your primary goal is capital appreciation, investing in plots of land can be more rewarding than apartments.

While apartments offer rental income, they often depreciate after a few decades. On the other hand, strategically located land plots can yield substantial returns, competing with equities. To ensure your investment maintains its value, regular monitoring and easy accessibility are essential. The exercise emphasizes the importance of making thoughtful choices based on your investment goals.

Inflation Protection

Apartments may not offer substantial capital appreciation, but their rental income can be a reliable hedge against inflation. Rental income can be an ideal income source for retirees or those seeking supplementary income. In desirable neighborhoods, rents typically rise in line with inflation, and many rental agreements include annual increments, providing a steady source of increasing income over the years.

A Safe Harbor

Real estate serves as a diversification tool in your investment portfolio. Unlike financial assets, it behaves differently and is often a haven during turbulent times. When economic crises strike, buyers may stay away from real estate, but property transactions typically slow down instead of plummeting. Real estate owners usually hold their properties long-term and are less inclined to liquidate them for emergency funds.

How to Approach Real Estate Investments

For ordinary investors looking to venture into real estate, here are three approaches to consider:

Capital Gains Focus: If you're young and seeking capital gains, consider purchasing affordable land plots you can monitor (In the area where you live or where you have direct access/hold). Avoid excessive leverage and allocate no more than 10% of your net worth to this asset due to its illiquid nature.

Delay Apartment Purchase: If you still determine where you plan to live and work long-term, you should wait to buy an apartment. Apartments typically yield lower rental income than the EMI incurred on the purchase, making them less favorable for leveraged investments.

Settle Down and Invest: If you are in your 40s or 50s and have a clear idea of where to settle, consider buying a home or apartment in that locality. Minimize leverage and use your savings to avoid dealing with EMIs post-retirement.

Conclusion

Wealthy people are attracted to real estate because of its potential for portfolio diversity, inflation protection, and capital appreciation. You may use real estate to create wealth and safeguard your financial future by picking the appropriate property type, paying attention to location, and comprehending the cyclical nature of the market. Real estate may support your entire financial strategy if you make prudent investments.