About Me

My photo
Neeraj Chauhan is a Certified Financial Planner and CEO of The Financial Mall. The Financial Mall is a financial supermarket & in operation for over 20 years. It manages total financial affairs of clients through wealth management and financial planning Process.

Tuesday, November 22, 2011

What sort of problems can “Too Much Real Estate” cause?

Well, today most people are in kind of race to acquire property and leveraging their future income although Lot of planners have already talked about risks of improper asset allocation and excess leveraging’s but real estate is still a darling asset for investors.

Such affection towards real estate is largely attributed towards fast run up in land prices over last few years & People have started feeling that real estate is an investment which gives high risk free return. (Really wonders if they remember the principle of economics!)

 Some of the most common financial problems investors might face with “owning too much real estate.” And by owning, I also mean in the process of owning are High construction costs, delayed projects, high maintenance costs, and huge supply levels to name a few. But low liquidity and high interest rates are what could keep them up at night. Housing liquidity is used to describe how easy it would be for you to quickly sell your home at an “acceptable” price. The lower the liquidity, the harder it would be to get rid of your house in an “emergency” situation (job transfer, budget constraints, etc).
Higher outflow in case of Increased interest rates: The maximum amount of monthly income that should be dedicated to Housing EMI  is 25%. It is quite possible that if EMI ranges up to 30-35% of income will still be alright. But if 40% of household income goes to pay mortgage, then it could be a really big trouble. This isn’t always the case, but it is often the case.

No Tax benefit: when the market cycle turns downward then most of the projects gets delayed due to short of funds or builder interests as a result higher cost, severe liquidity issue and The worst part could be you will not even get tax break till possession of the property while you may have to make your time linked payment.

Improper Asset Allocation : Most buyers have no clue about how much real estate do they need in their portfolio? What should be the right product mix? The answer will determine whether or not they are in a “healthy” situation. Increased EMI can force many borrowers to liquidate their other saving to repay some amount of loan which will expose them to improper portfolio diversification. Any deterioration in economy, job or income scenario can force them towards distress sale of property or missing some of their important financial goals.

Increased Cost of maintenance: Maintenance charges, electricity bills, property Taxes, Wealth tax could be some additional expenses on your pocket if property is handed over and the more one spend on housing, then less he can spend on…everything else! This means that most likely you can’t save money, can’t pay off debt, and can’t go on vacation. Having a high housing cost percentage leaves very little room for error. You MUST turn to your budget and evaluate “what if” scenario.

Whether you should buy or not, you need to know where you stand. What is the objective to buy this property? The solution very well may be that you sell your existing property. This is a terribly tough decision, but it could save the rest of your financial life.

No comments: