Equity Millionaire VS Real Estate Millionaire

See, I have a couple of questions for you guys because you do real estate. The reason why I am unable to do real estate, there are two big factors in it. One, you have gyan about one particular market, you know, so you have those insights. As a user, I would only know the price of the flat in the society that I am living in. Beyond that, I don't really know what is going on in the market. So how can someone like me who doesn't have knowledge about the real estate market, I cannot invest into it, which becomes a problem. The second problem that I see with real estate is in, I'm not saying all of them, but a large number of real estate deals have a decent enough or a significant enough cash component which is involved in it, which is the black money that we are talking about. For someone like me who has been in a job, you know, who doesn't have any cash generation or any black money, being a participant in the industry and, you know, as a seller also in the market, I can tell you that in the most, it's not 100% clean that I can, you know, of course, fall for it and you rightly said. But now if you buy with all the larger corporate developers, 100% check is definitely an option with you. And the first question which you said, where should I get that information from? Incidentally and luckily, now you have so many listing sites like Magic Bricks or Housing or there are multiple rent, you know, rental sites also which are there. From there, you can start searching for the basic information and then you have brokers. Of course, you cannot be involved, you know, with the kind of effort it needs in a complete search of what you want. So, you have to employ brokers which is part of the transaction cost which it entails. Even if you don't want to go to any broker or find out any magazine, just go in your area. In your area, you know that which is the most convenient asset to get in, get out, get halfway through the night if you want to get, you know, any medical, you know, chemist shop or whatever, right? So, you know. So, that itself is by design factored into everyone. Sir, my point in this was that I cannot outsource this decision making to someone else. I mean, there is no one, I cannot put… So, that's the advantage. So, the next question is an advantage or an opportunity for you to create an extra alpha which you cannot do it in MF. Liquidity. Liquidity is the biggest challenge. Second is ticket size. The ticket size is always higher in real estate. However, let's say if you are buying a house, bank can give you 80% of it which makes your ticket size larger than what you generally can invest. So, you get to participate in a 1 crore asset with a 20 crores capital. This leverage is only there in real estate. So, this is advantage plus disadvantage. The way you want to see it. Right. So, now coming to the disadvantages of the equity side, what I feel the biggest disadvantage of equity is within the next 30 seconds, I can tell you how much money I have in equity. And that acts as a huge problem. Today, I see my dad who is 75 years old. One of the big shares that he owns is HDFC Bank. You can call him anytime and ask him what is the condition of HDFC Bank. Because the price is so readily available to you all the time, it keeps increasing the BP. It doesn't matter if it has increased or decreased for 10 years, I don't want to sell it. Exactly. I think the other disadvantage is the control or your ability to manage the asset. You are a recipient of whatever output you have. Whatever will be, will be. No, I will defy this a little bit. I feel there is still a level of control. If you look at real estate versus equity in this case, if I talk about the last 10 years in equity, not more than 50 companies have gone defunct. Be it the likes of DHFL or DS Kulkarni or Gitanjali JMS or those kind of companies which went bad. But if you look at real estate over the last 10 years, you have seen lakhs and lakhs of homes which have not been delivered. From a buyer's perspective, today I cannot exit that property till the property is delivered. Now that's the status of that property. If I buy a share today and I see trends going down, I can get out of the stock and say fine, I'll go out of it. I bought Jet Airways at a very high price. But I saw it falling down after 30-35%, I realized I'm screwed, I got out of it. It went down 90%. So at least I could take a hit at 35% and say fine, I'm done. I think that opportunity to exit a bad position lies in equity as against in real estate is my understanding. What are the advantages of investing in real estate or equity? As far as the advantages of equity are concerned, one is that it is an asset which over a long period of time is going to beat inflation. So whatever money you have right now, take a 10-year period, it will do it. Second is, you don't really need a lot of money to get started. The third advantage which I see is that this is an extremely liquid asset. I don't want to sell my equity portfolio over the next 10 years, 20 years or for a very very long period of time. But in case something happens, I can liquidate all my portfolios, get that money. But I think one more very big advantage right now which exists in our country is the tax arbitrage. So if you look at any gains in long term gains in equity markets, you end up paying only 10% of the earnings which you make and that also beyond 1 lakh rupees. So that means if you have in a year made 1 lakh rupees of gains, long term gains, you don't get taxed. So you get taxed effectively only on the incremental above that. Second thing is, the beauty of equity is that when you stop investing, let's say today I stop investing, I can convert this SIP into something known as SW, which is Systematic Withdrawal Plan, which I call free salary. So tomorrow onwards, I can start withdrawing a fixed amount of 1 lakh rupees a month, 2 lakh rupees a month and my corpus still will never get deteriorated, it will keep on increasing because the balance money is still compounding. So that magic of compounding can happen only in, I think, this kind of a set. Now in real estate, I think one is rental income, which is passive residual income that keeps coming to you. Two is the ability to get ODs, which is like leveraging your finance, right? Three is you get tax breaks, right? Four is you get appreciation on your assets. The other advantage which I just want to add to the points you have made, the inflation protection. If I recall 2006-07, the cost of construction in Bombay was about what, 700-800 rupees per square feet. Today, we are standing at around 10,000 rupees per square feet on carpet area in Bombay. So that is a huge difference. So if you are already owning that asset, which effectively means the new asset is not going to take place unless and until the more money is pumped in. So the new asset, the cost of replacement is very high and automatically it gives you that appreciation which is coming through the inflation. And you don't have to work, you don't have to monitor, you don't have to actively participate. It will definitely come. And the last point that I want to add on this is control. When you see there is a change happening in the area where your property is, you get the opportunity to change use of your property. So for example, in one of the areas where I took property, I went into that area much early. And as residents started coming in, the first thing I did is, in the asset that I had bought, I opened up a school. I ran the school pretty much for a year and then gave it on rent to somebody else with the property and the school because I didn't want to get into the headache of running businesses because passive income means really passive. So I can alter change use of these stuff, of my assets based on what are the macroeconomics and situations and then I can put to use like that. How have you made money through real estate or equity? So I think over time I have realized that liquidity is power and to be financially independent, liquidity is key. When you need money and your money can't give you money, it feels really bad. So when there is a flat, an apartment, if it's a 4 crore rupee apartment, if you want to let's say take out 10 lakh rupees, the only way you can do is through a LAP, loan against property. Right. You cannot sell a bathroom, you cannot sell a kitchen, you cannot sell one of the bedrooms. It's very difficult. Right. In our case, we have liquid mutual funds and over 11 years, I have done a return of almost 16 to 17% IRR, whatever we want to call it. So the money that I have made through equity has been primarily through mutual funds. I kept putting money in those mutual funds, equity based mutual funds and from that, I got a lot of confidence to be financially independent or retire early because if someone says that my income is not coming, so I will sell this and that, I can sell it in very very small chunks. I can run my business by selling it for 2000 rupees. To be really honest, I haven't really tracked returns over the very very long term, but over the last 5 odd years or so, I think I should be somewhere in the 15 to 17% range on my equity investments. My returns came in two parts. My first investment almost gave me like a 28 to 30% return, but that was first, you know, taste of blood. The second investment I made was my end-use house also. There my returns were little tapered, which now has, you know, transpired. In fact, I was into losses till one year after COVID also. But that's the reality of the cycles which happens during, you know, when you invest in real estate. If I take the value of what I had invested over the period till now, it's at about 81% growth, but I cannot calculate all the tax benefits that I have had, all the cash flow that has... You have taken out for expenses. A lot of cash flows, yeah. You have got the money, right? If you go and add that money, you have to put it on top of that also. So it's not easy to calculate. So but if you look at, you know, cash to cash, probably 81% and then all that came over and above that is, you know. So the next question is, what is the criteria behind investing or picking the stocks or properties you invest in? My decision making is primarily based on my asset allocation. If I have taken a call that I'll be, let's say, somewhere around 60 to 70% in equity, if the markets rise so much that my equity portion has now become 75% of my portfolio, then I will sell it, irrespective of whether I need the money or not. It's a great insight. I would say. Let's say if my comfortable range is 60 to 70, if it goes above 70, I'll sell it. If it falls below 60, I'll buy equity. So I have this investment policy statement. I have made it and I have given it to my wife also that suppose something happens to me, then what to do with the money, these are the thumb rules. It should be this much. If it falls more than this, then buy this much. It is possible to move money from here to here. It's a simple one-page document. The moment you understand a particular trend, start investing there. Second rule of investing is very simple that you invest gold-based. If I have to fund my son's education, there is a mutual fund allocated for him, which is there. I know this. This mutual fund will reach when he's 18, this will reach 2 crore rupees. So that corpus will be used. See, for me, the criteria is most likely it should be a pre-lease property so that I don't need to find somebody to lease it. Two is it should be near a school, college, hospital or a commercial property or a commercial activity area so that it finds tenants faster. Lastly, you can always time it because you have good reaction times. So how you can time it is there is a good return in the equity market. There is a return in real estate in the next year. So whenever equity market is giving good returns, invest in real estate. You will get good returns next year. I can give you one classic example. There is one HDFCC, I don't want to name him. Big guy. Just after COVID, he invested with us at a price of 52,000 rupees per square feet. He doubled his money in two, two and a half years. Almost. And that was his smartness because he knew this pattern. Similarly, the third pattern is your election cycle. Before the election cycle, you invest and definitely you will reap the benefits. We got our panelists to react to some tweets on the equity and the real estate markets. And here's how that went. Oh, I'll read this. From a dear friend. Every once in a while, I like to take selfies with bad financial decisions that make me immensely happy. Here are the top two. One is with an apartment building it seems or a land. Piece of land. And the other one is with your son. First one, I still feel because I'm an equity investor, I may still agree. Second one is the great investment. I think they will. It's not. The amount of money that a kid takes out of your life is immense. Yeah, the kind of fees I'm paying for my son. If I pay for the entire 18 years, I will give him a 5 crore corpus after that. One difference of opinion. Having a son is not a financial decision. That's not what is in the tweet. So, the fact that we own that land, it does give me a certain amount of happiness. That I will grow my own radish and eat it. Which I cannot do that because I live in an apartment. So, I have no kitchen garden or anything like that. The second thing, having a kid gives me immense amount of happiness. There is no doubt to it. But if you look at it from a monetary perspective, the amount of money me or anyone. Anywhere. Any parent, the amount of money that they would spend on their kids is horrendous. Is horrendous to say the least. So, the way I interpret this is, this is pun intended. Okay. So, if you understand what he's saying, he's actually happy about both the assets. Yes. The tweet says, I see family members with real estate investments struggle with tenant issues, maintenance drama and the pain of selling those investments as they get older. A reason not to benchmark mutual funds with real estate. I think I totally agree with the tweet because I see that now with my father. He had few investments in real estate which he made early on. Which were land parcels. And it gets a little difficult at an older age to manage them. And I think one mistake he did was that he didn't buy in the vicinity. Even if you want to invest in real estate, try to find out close to something where you can physically monitor. Because it is a physical asset. It is not a digital asset. So, I just want to add a qualifier. I agree with her. The qualifier is, these two are two different risk classes. Mutual funds are extremely safe. So, somebody who is seeking safety, not getting higher returns, then we go for mutual funds. But if somebody understands the subject very well, he can maintain it, he can take the drama, he should jolly well go for real estate. He'll make stupendous returns. Classic example is him. I'll read the next tweet here. It says, case in point, more equity investors have lost their money as compared to real estate investors. Equity is a much higher risk asset class. See, these are all subjective. They don't mention the conditions apply here. If you are on the equity side, on good stocks, you don't need to worry. They may go down for a while. But they will bounce back. Because everything will go up and down. So, I think the gentleman here with this tweet is not well informed of his subject. I would disagree. I think what he has said here is fairly valid. When you talk about more equity investors have lost money. So, the number of people who lose money in equity, I believe, would be larger than the number of people who have lost money in real estate. That's the fact presented. The conclusion is little defective. Yes. So, the conclusion part is something that I disagree with. One very big thing is if you lose money in equity, you lose what? 10%, 20% of your portfolio. In real estate, let's say if I buy a flat and that doesn't get delivered or there is an earthquake or there is some tenant who occupies it, I lose the entire thing. And real estate for a lot of people, for people who have just one flat, that is their entire life savings. So, the impact of losing in real estate is significantly more. But if you talk about the number of people, yes, I believe in equity, all equity investors would have lost money at some point of time. But I think there is one additional qualifier which needs to be added. So, it depends on what kind of risk you want to assume. If you are taking the highest risk and you are talking of safety, it's like oxymoroning for me. Do you invest in opposite asset class? Why or why not? So, I will start with this. I had a twist with, one twist with the real estate investment thanks to my dear friend Ganesh here. So, in 2010, you know, there was some project coming up very close to our office. And we decided as a business development activity to go and visit that place. And somehow, we felt that this place is good and the ticket size was small. In Bombay, we were getting a one bedroom for 65-70 lakh rupees in 2010. Under a crore in Bombay is unheard of, Bombay, pure Bombay, main Bombay. So, he pushed me to invest that capital. And I think that was my one but very successful real estate investment. I made an IRR of approximately, that's a compounding return of almost 18-19%. Which I feel is a great return for a 4-year period. After that, due to those hassles of stamp duty, going, registration, debt, 7% stamp duty, 6% stamp duty, I felt I would like to stay away from it, make it more controlled on app. So, I moved myself completely to equity. I personally don't own any real estate. As a family, we do. Why I don't invest is, I have some startup equity and some startup investments which are there. And I have hope that someday, that big payout is going to come. There exists, I believe it's section 54F or there is one particular section which exists, in which if you sell your equity and you invest the entire amount in real estate, you don't have to pay tax on it. For that section to be applicable, you should own no property. So, as a startup investor or ESOP shareholder, my hope is, one of the companies that I have invested in, it will IPO. Once it IPOs, I will sell that. And then I will buy a property from that and save on taxes. When that happens, then we will learn how to invest in real estate. Thousands of people do it. I am smart. We will find out. You can always call us. Give us a call. I have invested in equities, but at a digital stock level, which is more of an experiment. Otherwise, nothing. To answer that question. What percentage of your portfolio would be in equity? Nothing. Zero. So, I did equity between 2006 to say about 2010. So, I used that investment to get my initial, so to say, fund generated to start with the real estate. So, that was the time when I did it. Apart from that, now I don't hold not a single penny in any sort of stock. What other assets do you invest in and what is your portfolio split? So, in my case, the other asset portfolio would be between 12 to 15% of the total. Balance everything is real estate for me. And what is there in 12 to 15%? These are alternative investments which typically come from companies like 8NYS, etc. So, for me, the house that I live in and the land which the family owns, that would probably be 20% of the portfolio. But if you leave that aside, 65% is in equity, 35% is in debt based assets, debt mutual funds. So, for me, it is safe to say it is 100% in real estate. Because there is 0.0001% in cryptos and 0.0001 in some kind of plantation. But otherwise, everything is real estate only. So, I think around 60% of my capital would be mutual funds. Around about 7 to 8% would be direct equity. Some very specific stocks I have picked up. High yielding debt which gives me passive income is around about 20%. 3% would be in PPF and the balance would be in startups. What goals do you invest for and why is equity or real estate the best investment for these goals? So, see the goals that I invest for is, line number one is passive. I don't want to trade my time for money. I don't want to get up in the morning, look at what's happening to the market. So, that's passive life where you just don't bother about what's happening around you. So, that's my goal number one. Goal number two is generational wealth. I am a very strong believer in that you should generate generational wealth and then hand over the generational wealth in a way where your future generation is not able to destroy it. Three is once you have built generational wealth, put it into a trust. So, in your future generations, if you have one or two duds, those duds cannot damage what you created. If you put it to a trust, it doesn't get damaged at all. So, that's my goals that I have it and I think doing it in real estate is because it gives me peace of mind. I don't bother about fluctuations. That's why I think that real estate really watches out for me and hence I watch out for real estate. So, my goal in my case of investing is that I ensure that my money should give me better returns than the market. And when markets are not good, at least my losses are minimal. That's the simple principle I try to see. Whatever it entails, I do. That's as simple as that. So, whenever you are chasing a long term goal, it's better to have a passive asset like a real estate and you keep the asset and you forget it. Fill it, shut it, forget it. And after 10 years, 20 years, you will take care of your goal which you have decided. So, I have two very clear cut goals which are there. One is that I need money to eat on a day to day basis now that I do not have any income coming. The other goal that I have is whatever money I have, it should generate a little more than inflation. Now, if it generates 1% more than inflation or 3% more than inflation or 5% more than inflation, the more it does, the better, but it should beat inflation. Absolutely. And equity is a very convenient, very hands off way. So, 5 years money that is there in your debt and that's there. Anything that is beyond 5 years, that goes into equity. Will it beat inflation? I am reasonably confident it will. And that is my key goal. I think goals essentially are life events. Any life event. There is one mutual fund attached to each goal. Advice to people who are looking at wealth creation through equity or real estate. First of all, ensure that when you buy real estate, it should be most likely a rarer eastern asset. If it is primary purchase. If you get into secondary purchase, even if you have 100% of the money, get a loan against that property from the bank and through a nationalized bank. If the nationalized bank approves of that asset and they are willing to give you a loan, only then should you buy it. Because then they ensure that the land or the apartment or whatever asset you are buying, the title is clear. For buying, you need to look at upcoming areas in your locality. If you don't have upcoming areas in your locality, you should get on to some of these new express highways that are coming in. Be rest assured that all these express highway exits will boom. This is the point when you go and buy and just hold it. Within a couple of years, you will be happy for the decision that you have made. I think he has pretty much summarized it. Only one point to add. In case somebody is buying real estate which is on the safer side. For example, if you are buying a property which is there in the already established locality. He is talking of something which has potential. A property which is already performing, see the rental and the capital value ratio. Residential, it should be 3%, 6% around for the shops, etc. 8% for commercial property. Thumb rules will help you see whether you are in the right band or not. That's about it. For equity, I would just suggest buy index funds. Don't use your brain. Very smart people have used their brains and burnt their hands. Whatever amount of money you have, invest it in index funds. Bulk of your savings should go into equity. Bulk of your equity or rather all of your equity, buy index funds. I am taking this advice. 99% of the people will not be able to beat index funds if investing in equity. The first thing you should do is get educated. If you want to buy a Rolls Royce, don't take advice from somebody who is driving a Maruti. If you really want to achieve a great financial freedom, great financial independence, don't listen to people who give tips. Because tips are available in restaurants. So, first is educate yourself. Second thing which I would like to tell that India has a great potential. In 2003, the NSE Nifty was around about 1,950 which is today 21,300. So, if you look at 20 years, it has grown by 11 times. And in terms of CAGR, it's 12%. That means if you would have put 100 rupees in 2003, it would have become 1100 rupees in 20 years. Less of dividends. Dividends would be another 2-2-2.5%. So, 13-14% as they said, don't use your brain. They have also given you 13-14% return. Obviously, there will be ups and downs. There will be times of difficulties. But overall, it is going to be a great bull run. If the next decade or two decades or three decades belongs to India, this is the right time to be in India. And we should all focus on just learning, educating ourselves and keep on investing. And stay on the pitch as long as you can. You will definitely definitely make a lot of difference. Thanks for sticking around till the end of this video. We hope you like what you saw. 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