The founder and Chief Executive Officer (CEO) of Zerodha, Nithin Kamath on Thursday followed up on an earlier post on investing in real estate in which he had claimed that ‘buying a flat on the outskirts of a metro city is like buying smallcap stock’.
In a detailed LinkedIn post, Kamath said that one needs to consider if the property yield is greater than inflation. Investors can calculate yield by first deducting the interest and maintenance from the rent and then dividing that figure by the total cost.
For real estate, rental yields are probably the best measure of fundamentals, he said.
“If yield is negative, the price has to go up by at least 10% per year to beat inflation, or the price has to double every ~7 years. For the price of the property to double every 7 years, the rents also have to go up as much,” he wrote. Kamath, however, pointed out that this is not happening in most places in India.
“Real estate is illiquid, just like private market valuations. Real price vs last transacted price that sellers claim could be way off (lower). The other risk is since the price is fixed & paid upfront, you can’t take advantage of price fluctuations through a SIP as in stocks or mutual funds,” he said.
Kamath further said that buying real estate where the prices haven’t already appreciated (in tier-II & III, outskirts of a metro) can lead to a good return on investment. “But this is like buying a small-cap stock hoping it becomes large-cap, only a few do. It is a high-risk strategy & hence capital allocation should be lower,” he added.