Investing in land can be risky too!

By | October 31, 2016

You may not get the same level of return as your parents

Earlier, we discussed why your investment choices must be different from that of your parents or your grandparents. That said, we realised that you would still be keen on making real estate investments, specifically land, just like your parents and grandparents did. Therefore, in this article, we discuss certain factors that you should consider before investing in land.

Investment risk
Land prices have increased manifold in the last 15 years. It is unlikely that investment in land will yield similar returns in the future as it did in the past. To moderate your real estate investment risk, you should consider the following:

One, buy several small plots of land instead of one large area. In addition, your initial investment per land should be, preferably, ₹10 lakh or less.

Two, if you adopt the above-mentioned suggestion, you will have to identify land outside city limits due to the low per asset capital allocation. This raises concerns regarding the security of your investment. If you do not ensure that your land is free from encroachment, you could well be the victim of land theft! So, buy land in an area you are familiar with. Or buy along with several of your friends or family members. There is, indeed, comfort in a crowd!

Three, you should consider land investment to meet life goals that have time horizon of 10 years or more. Why? Unlike equity, land takes a long time to generate capital appreciation. Besides, it is an illiquid investment. So, converting your investment into cash takes a while. Therefore, investing in this illiquid asset, expecting short-term appreciation, may not be prudent.

Finally, your land investment is subject to deferred taxes. In comparison, at present, long-term gains tax on equity is exempt. We are not suggesting that you should consider equity investment just to save taxes. But do remember that you will have to pay a sizeable amount as capital gains tax when you sell your land.

Unrealised gains
You do have something to cheer about land investment! If you invest in equity, the unrealised gains in your portfolio can be a cause for concern. Why? If you do not continually sell your equity investments, the stock market may decline and wipe out the unrealised gains in your portfolio. Remember, it takes a lot of effort to recover losses on your investments than it takes to give-up gains; a 25 per cent loss in a stock requires a 33 per cent increase in the stock price to recover losses, whereas a 25 per cent gain in a stock requires only a 20 per cent decline in price to wipeout the gains!

You do not face such issues with your investment in land. Not that land does not have unrealised gains. It is just that if you have 10,000 units in a mutual fund, you can sell 7,000 units and hold the balance. But if you hold a small piece of land, you cannot sell one part and hold the rest! So, you are forced to ignore your unrealised gains till you sell the land. This Hobson’s choice-making reduces the regret you face in holding on to your unrealised gains on your land investment. In addition, as a physical asset, land is affected by supply-side constraints. Therefore, compared to equity, the possibility of losing the entire unrealised gains on your real estate is much lower.

Remember this: Besides checking the land documents, you should carefully analyse the risks associated with land investment based on present day current factors; for you may be unable to generate the same levels of return as your parents or grandparents.

Source: Business Line