How is the real estate industry performing as compared to the stock market industry?



How is the real estate industry performing as compared to the stock market industry?

 We all have heard about unconventional gains in both the real estate world and the stock market. People love to diversify their portfolio in both these avenues. However, there are certain limitations in both industries. There are periods of recession in both but you can make really high gains in the stock market which is not possible in case of real estate. 

 To understand both these industries better let's take a look at the capital requirement, investment horizon, ease of purchase and sale, returns percentage, profit earning potential, tax implications, and skills requirement.

1. Real Estate: The real estate industry involves buying any physical property be it a commercial office space, commercial shops or residential apartment. The capital requirement in the real estate space is very high as compared to the stock market especially if there is land attached to the property. A property in metro cities like Mumbai would cost you crores of rupees. You don't need a whole lot of skills to buy a physical asset which is not the same in the case of the stock market. Also, the growth rate cannot be achieved on a short horizon. One needs to stay invested for years to get considerable returns from a real estate property.

Furthermore, it is very difficult to find a buyer for your property immediately if it's not in a very popular locality. The investor has to go through a lot of hassle or has to pay an extra commission to a real estate agent for making the sale happen. Even a lot of time has to be spared for analyzing the properties and making the right purchase.

The returns from a real estate property are in two forms. One is the rental income from the property and the other is capital appreciation. On average, the returns on a property in India is 9.5% (inclusive of rental income). However, you can gain returns of 15-20%, if you had invested in some unpopular area and there is some sudden development like coming up of an airport, court, big conglomerate or better road connectivity. However, these profits can be made only if you sell the whole property.

The tax levied when you sell a property within 3 years of purchase is 30%. So if you earn $ 1,00,000, then you will have to pay $30,000 as tax which comes under the purview of short term capital gain. Whereas, if you sell a property after 3 years of purchase, then you need to pay only 20% tax, which comes under the purview of long term capital gains.

 2. Stock Market: Stock market involves buying and selling shares of a company for a profit. The capital requirement in the stock market space is as low as 5-10 rupees(penny stocks). You don't need to have a large sum of money to invest in shares of a company. Instead, you can buy shares of different class (small cap, mid cap, and large cap) of companies for a portfolio of just a lakh. Other than that, the stock market is very volatile and therefore you don't have to be invested for very long periods of time. One can sell at any time and many stock traders use the intraday facility to make daily gains. However, the risk in the stock market is very high, you can even lose all your money. So, it is very important to have a prior understanding of the stock market in order to get minimal returns from the same.

 Since you can sell at any point in time, people buy shares when the markets are low and sell at the estimated target prices. Also, opposite to real estate, you can sell part of your shares instead of the entire property as is the case with real estate. Stocks are traded in large volumes and therefore you don't have to search a buyer over the counter. However, in some cases, a sudden mishap happens in a company and there are only sellers and no buyers, then the prices keep on coming down and you aren't able to sell the shares. This happens rarely but it does happen and therefore a good understanding of the company's operations and profitability is required.

 You can earn very high returns from the stock market. Indices like the Sensex have given a CAGR of 15% every year. But you can also make use of the volatility and make much more returns by day-trading. Stocks like Ashok Leyland, Suntech Realty and Menon Bearings have given more than 40% returns in a single year. One can make really high gains with the right analysis of stocks, which is not possible in case of Real Estate.

 The tax levied when you sell shares of a company within 1 year is 15%, which comes under the purview of short term capital gains. However, if you sell the shares of a company after 1 year, your income is taxed at only 10%, which is far lower than in the case of real estate. Clearly, tax imposition on stock market gains is lower than real estate gains.

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