wealth calculator

Why investing in property alone is not a good saving idea


Ankita, a single mother, is a doctor and lives with her children and father. She is associated with a hospital full-time and draws a monthly salary. Apart from the house they are currently living in, Ankita and her father have invested in two smaller houses. It is easy for her to get a loan from the bank and the safety of property makes her feel financially secure. Though the value of the properties has appreciated, the EMI payments are a drain on her salary. Has she taken the right decision? What are the things she needs to watch out for?

Like most investors, Ankita is building assets for financial security. The important question is whether these are aligned to her needs. Since she already has a steady income and a secure job, she may not need assets that give her a regular income. Therefore, assets like property, which grow in value, are aligned to the overall objective.

However, there are three drawbacks in Ankita’s strategy. First, she may have requirements which cannot be taken care of by her salary. An international holiday, quality coaching for her children or extra-curricular activities, repairs and upgradation of her house, etc, might require money which cannot be provided by her assets. Property as an asset is a large, indivisible investment. Since most of her needs are likely to be smaller in value than the property, she is unlikely to sell it to meet them. She will have to build other assets to take care of other needs and goals.

Second, as a large part of her income goes to service the EMIs, her ability to save will be limited. She should try to rent out the property so that the rental income contributes to the EMI and enables her to save for other assets. This will result in a more balanced and diverse portfolio.

Third, her ability to take further loans for any unexpected event or pay insurance premium will remain limited. She should work towards controlling her other expenses, or earn additional income. Rebalancing her assets should be her first priority. She should try building other assets since she may be unwilling to take the drastic step of selling one of her properties.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.


Source link