Real estate as investment has become more
and more popular over time. Even though investment in the sector collapsed
after the 2008 financial crisis, people still invest a considerable amount of
capital in real estate. We take a look at how investing in real estate fares
against an alternate asset class viz. Peer-to-Peer Lending.
1. Capital Outlay: Real estate requires a
huge amount of capital investment. A lot of people do not readily have this
amount of capital available at all times. Even if someone opts for debt
financing (and the corresponding Income tax benefits), at least 20% of the
value of property has to be self-financed – which can be substantial. Though
everyone is anticipating a change in the IT rules, in this budget, however, the
benefits related to income tax exemptions are also limited to 3 years.
Hence, if you don’t have
adequate capital available, the other options are not very favorable.
On the other hand,
Peer-to-Peer lending does not require high capital investments. Most P2P
Lending websites allow you to invest lower quantities and spread your risk.
2. Low Liquidity: Real estate investment is a highly ill-liquid asset class. Properties can't be sold quickly or easily
without a substantial loss in value. This means when you do need immediate
capital and cannot source funds from anywhere else, using your real estate
asset is not an option for immediate capital.
Peer-to-Peer lending, on
the other hand, have liquidity. Firstly, as a lender you get monthly payments
on your investment. If a situation arises where you require your money before
the tenure is over, you have the option of selling the contract to another
lender who will take your place and receive the pay-out instead.
3. Cyclical nature: Real estate prices tend
to have cyclical and are generally dependent on demand and supply in an area
and/ or the state of macro-economic affairs in the country. If one is stuck in
a wrong cycle or there is an incorrect assessment of prices, it can drastically
erode the capital value of the investment.
On the other hand the
capital and interest in a peer to peer lending parlance remain unaffected by
the state of economic affairs. The investor receives fixed monthly income.
4. Management and Maintenance: Regular
maintenance of a property is a necessity. There are refurbishment or regular
maintenance costs that have to be incurred with respect to holding a property. Furthermore,
there are annual/ monthly maintenance charges that are to be paid in a RWA and
yearly property taxes.
Compared to this, a peer to
peer asset does not come with a burden of maintenance. With an ease of online
investing and monitoring – everything is there at a click of a button.
While real estate is still a well-known
investment option, it is not the easiest one. It requires a lot of effort and
time from the investor and demands high involvement. This is not the case for
P2P Lending.
