Investment Strategies: Real Estate as an Investment option with compounding returns

People make investments in Bank Fixed Deposits, Government Bonds, Capital Markets or Stock and Mutual Funds, Gold, Silver and other metals, Businesses, and Real Estate. Investments are of three kinds – Conservative, Moderate and Radical.

The risk, return, safety and security of investments in all of the above instruments is variable. Some offer a lower return but higher security, some offer a high return but low security and high risk.

Conservative investment instruments such as Bank fixed deposits and government bonds, ensure steady returns as per the guidelines, they are secure and also highly liquid, meaning in times of requirement one can discontinue the instrument and avail the funds.

Capital markets, stocks and mutual funds are radical investment instruments, they may provide higher returns than the conservative investment instruments, but conditions apply, such as the market trends, economy, sectoral trends, government policies, etc…. These instruments are also highly liquid as one can avail the funds easily upon sale of the instrument.

Gold Silver and other metals are radical one’s as their return is dependent upon market and economic conditions. They are liquid in nature as they are accepted globally.

Real Estate is a class of investment that is difficult to categories into any one of the above categories. The other investment instruments are generally possible to be made in smaller values, however real estate investment is a high value investment as land is not cheap, depending on where you plan to invest though. For the sake of this discussion let’s assume that one who plans to make a real estate investment, would like to make it in a zone that is developing and will yield good returns and growth overtime.

The other investment instruments do require meticulous planning, and the fund to make those investments can be arranged more easily than making funds ready for a real estate investment. While the other investments can be easily liquified, real estate investments cannot be easily converted to liquid money, as such transactions cannot happen instantly. Closing a fixed deposit or selling certain shares or exiting a mutual fund investment can be done at one’s finger tip. But to get a real estate property sold is far more complicated, as finding the buyer at an agreeable price is a time consuming process.

Real estate investments must be made only when you have already made enough liquid investments that can be used to convert to money if required down the line. Locking in funds into real estate investments without having the sources to extract funds from, such as liquid investments, can be stressful. It is advisable to have a portfolio of investments that are liquid and separate from the real estate investment portfolio.

At times certain real estate investment opportunities may look very attractive and would tempt one to lock in funds in to the opportunity by exiting other liquid investments. This can be great move provided you have the cash flows that can manage a situation that demands funds. The logic to make this kind of a move is normally favorable for both short and long term, if, in the short term, the annual return in terms of monthly rentals amount to a better return than the returns from fixed deposits. And in the long term the real estate  asset value also increases, as opposed to the fixed deposit value. A fixed deposit value will be the fixed or floating interest over the year(s) along with the principal amount, and that’s maximum value of that instrument upon maturity or closure. But a real estate investment fetches monthly rental that rates better than the interest rates from a bank fixed deposit, and the value of the real estate asset as an instrument is also increasing over time.

It compounds faster.

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