If you are planning to build wealth using your money, there is no better way to do so than by making smart investments. Real Estate and Equity have emerged as two of the most popular investment avenues in recent times for people in India. In this article, we will discuss the difference between real estate and equity.
Why Invest in Real Estate?
Here are some of the top reasons to invest in real estate:
- Safe and Secure: If you do not have a big appetite for risks, then real estate is the ideal investment option for you. Unlike stocks and shares, the value of the real estate does not take a hit in a matter of hours. It remains stable over a long period of time and only takes a hit if some big global factors come into play, which is a rarity. Moreover, it is an emotional asset for many people who want a house of their own.
- Enjoy the Rent: Renting out properties can turn out to be an excellent source of regular income for you. It is important to note that you should get into it only if the rental yield is more than 3% to make actual profits. Since real estate investments usually take close to a decade to double up the initial investment amount, it is always better to rent the property and reap regular profits, albeit small ones.
- It Never Stops Growing: One of the biggest advantages of investing in real estate is that it never really stops growing. More often than not, the returns and the yield tend to soar up, depending on the location. Even if you are not planning to sell it in the end and want to rent it out, the capital price still keeps growing.
This is the reason why many people see investment in real estate as a safety net post-retirement as well. You can reap the benefits of the rent till you retire and then sell the property to get a lump sum amount, which you can invest elsewhere later on.
What are the Returns You can Expect from Real Estate?
When it comes to terminologies related to returns in real estate, there are three.
- Expected Return on Investment: This is the amount of profit or loss that the investor thinks he/she can make by investing in a certain property.
- The Required Rate of Return on Investment: This is the minimum return on investment that the investor believes should be for him/her to make the investment.
- Actual Return on Investment: As the name implies, it is the actual return on investment that the investor gets once the sale is done.
All three returns depend on the location of the property, the current market scenario, and the government schemes that aid the real estate environment. Therefore, it is hard to put a real number on this.
Why Invest in Equity?
Here are some of the top reasons why you should invest in equity:
- Potential to Earn Big: The possibility of increasing the capital investment significantly is quite big in this case. You get to enjoy this in the shape of capital gains and dividends. Once the company grows, you can reinvest your money to see your wealth grow even more. Increased market shares, new growth strategies, and new product launches are some of the factors that play a role in the growth of a company’s value. When the value increases, the market price of the share too increases.
- Easy Diversification: You might have heard how having a diverse investment portfolio is always better for you, and equity enables you to diversify the same. You can park your money across various avenues, which helps you weather the losses if there are any.
- Ownership of the Company: When you purchase shares of stocks, you are given ownership of the company. The larger the percentage of shares you have to your name, the more will be your say in the company. You can even be part of the board meetings and company decisions. You will also be given the annual reports of the performance of the company.
What are the Returns You can Expect from Equity?
In general, the investments made in equity can generate solid returns of 10-12%, but this is not always a sure-shot thing. One thing to always keep in mind is that you will have to face a lot of ups and downs with the returns in a year. However, if you stay invested for a sufficient period of time, everything evens out and you end up getting high returns. Also, you should diversify your investments so that even if one or two of them fail, the others will keep you afloat.
Where to Invest: Real Estate or Equity?
Here we are comparing investing in real estate and equity to help you with the difference between them and determine the ideal option for you!
| Categories | Real Estate | Equity |
|---|---|---|
| Definition | Investing in real estate involves the buying, renting, managing or selling of constructed property, under-construction buildings or land for profit. | Investing in equity means putting your money to hold stocks or shares in a stock market, which in turn helps you reap benefits through dividends, investments, and capital gains. |
| Expenses | There are expenses associated with registration, stamp duty, brokerage, maintenance, and society charges. Note that these expenses can vary from state to state. | Stamp duty, brokerage charges, and security transaction taxes are some of the top expenses that you need to pay out of your pocket when investing in equity. |
| Liquidity | It does offer liquidity but not much. Yes, you can sell your property anytime you want but it would not make sense if you sell the minute you decide to. You will have to wait for the right market value and the right buyer to get the desired profits, which can even take more than a decade at times. So, it is considered a long-term investment option. | It offers high liquidity. As a matter of fact, you can exit the shares or stock investments anytime you want during market hours. As a result, you have high flexibility in choosing the investment tenure in such cases. Depending on the investment planning, appetite, and goals, it is considered both short-term as well as long-term investment options. |
| Diversification | In real estate, there is no real scope for diversification. You have to pay a lump sum amount to invest in land/property or invest through instalments for an under-construction property. | In equity investments, you have a larger scope for diversification. In fact, you can diversify your investments by buying stocks or shares of different companies and industries. A diversified portfolio is always the safer bet. |
In conclusion, you should keep in mind that real estate is an asset that will always have some value, which is not the case with equity. However, equity has the potential to give you much higher returns than real estate as there’s also a higher risk involved. Therefore, it is your investment capacity, risk appetite, and financial goals that can enable you to choose between the two.