Sceptical About High Real Estate Prices? Here's a Better Way to Enter the Market...

May 2, 2019

Richa Agarwal, Research analyst

It was 1955.

Warren Buffett was 25 and just starting a family. And one of the first instincts of anyone out to start a family is to buy a house.

But not Buffett:

  • In Omaha, I rented a house at 5202 Underwood for $175 a month. I told my wife, 'I'd be glad to buy a house, but that's like a carpenter selling his toolkit.' I didn't want to use up my capital.

So, it's not like Buffett didn't have the money to buy it.

By that time, he already had US$ 127,000 - quite a large sum for the time. A good house would have cost about a fifth of that.

But he still didn't bite.

His reasoning was unconventional. But the pure logic of it is striking - a completely rational calculation of what would lead to a better financial result. It's void of all emotion and pre-conceived notions.

Buffett reflected on his situation at the time. He knew he had the skills to multiply money at a lucrative rate. Given that, he didn't see the sense in blocking a big part of his capital in a house.

He reckoned it would be wiser to rent a house instead, and use the money to invest.

You might be wondering how Buffett's decision and his situation 60 years ago could be relevant to you today.

But it very much is.

You see, residential rental yields back here in India are among the lowest in the world.

They stand at a measly 2% or so.

That is the amount of rent you pay per year relative to the market value of that property.

So, even if you had the money to buy a house, should you?

Looked at another way, renting a house is the equivalent of taking a loan at an interest rate of 2% per annum. For just Rs 2 every year, you get to use an asset worth Rs 100. You could then use that Rs 100 to invest.

Now, agreed that you probably don't have Buffett's skills and wouldn't be able earn the kind of return he did on that money.

But even a simple bank fixed deposit earns close to 8% today. Subtract the 2% rent you pay and that leaves you with a 6% surplus accruing to you every single year.

And if you are able to make investments that safely earn an even higher rate of return, your edge would be even larger than that 6%. Over the years, this edge can make a mammoth difference to your wealth.

Yes, when you rent, you may miss out on any property price appreciation that happens along the way. But relying on such appreciation for wealth creation is tricky. Who knows at what rate house prices will go up in the coming years?

It could be a fabulous return, it could be mediocre, it could be nothing, or it could even be negative (yes, this too is a possibility).

But make no mistake. While property price appreciation from today's already high real estate prices may be a big wild card, India's housing market - especially in the organised affordable housing segment - is bound to grow leaps and bounds as scores of Indians in growing economy buy their first house.

In fact, this is the kind of economic megatrend smart investors would do well to be part of.

So, is there a better way to play the real estate market?

You'll be glad to know that I've just found precisely such an opportunity. I just recommended a stock that comes with none of the baggage that typical real estate businesses carry - be it high debt, approvals or high working capital. Yet it's a great play on the affordable housing megatrend.

With regulatory tailwinds (policies that promote affordable housing and infrastructure construction), professional clientele, experienced management, a healthy balance sheet - this company is a strong bet on consolidation and growth in the real estate segment.

You simply cannot afford to miss this fabulous opportunity!

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: If you could look beyond elections and survive the volatility that the markets will likely witness over next few weeks, here are four rebound smallcap stocks that you could consider investing in now.

Recent Articles

This Smallcap is a Must Have Stock in Your Portfolio September 29, 2020
Investing in this smallcap could open doors of huge, long-lasting wealth.
My Top Pick for 2021 is Not a Stock. It is Something Much More Powerful September 28, 2020
My top pick for 2021 is something that has helped me and my subscribers beat the stock market by a factor of 2:1.
It's When You Sell that Counts September 25, 2020
How I alerted readers to the impending crash last week.
What to Do if there is a Second Wave of the Stock Market Crash September 24, 2020
Here's what I think investors should do in this selloff.

Equitymaster requests your view! Post a comment on "Sceptical About High Real Estate Prices? Here's a Better Way to Enter the Market...". Click here!