Most people prefer to invest in real estate. By real estate investment, we mean buying land for capital appreciation or apartment for earning rental income. As real estate is an immovable, illiquid investment requiring “lumpy” initial capital, the question is: At what stage in your career should you invest in it?

Here, we discuss why you should invest in real estate when you are nearing retirement and buy land during your early and mid-career phases.

Rental income Your job may require you to move from one location to another during your early-and-mid career. Investing in a house during this time may not be worthwhile. You have to maintain the property and ensure your tenant(s) are comfortable. How can you do that if you reside in another city? Then, there is the financial factor. Typically, you will make a 20-30 per cent down payment and borrow the rest. Your home loan will amount to about 40 per cent of your future monthly income. Why would you want to convert a significant part of your future income into a single immovable and illiquid asset? This question is even more relevant if you relocate often for employment reasons. Therefore, real estate investment is more meaningful for individuals approaching retirement.

Specifically, if you are nearing retirement and intend borrowing for buying the house, you should consider doing so during the last 10 years of your working life. But, if you plan to use your savings for this, you should do so during the last five years of your working life. Why? Your objective is to earn rental income to support your post-retirement living. The rental income is a function of the age of the property; new property will earn market rent while an older one will not. It is, therefore, important that you buy the property closer to your retirement.

Equity versus land Buying land is different as the source of return is capital appreciation. So, investing in it is riskier than in rental property. In some ways, land investments carry risks similar to equity. Yet, your preferred choice of investment during your working life should be equity, not land. Why?

Equity is more liquid and portable — you can carry your equity investment to any city you want. But what if you are averse to investing in equity? Or, if you can afford to buy land after setting aside money for equity investments? You should then consider investing in land. But remember, just as security selection is important for equity investment, land location is important for real-estate investment. Besides, you should consider two factors before buying land. You should buy several small plots of land instead of one large one. So, if you have a choice of buying a 4,000 sq ft land and three smaller plots adding to the same dimension, choose the latter. The capital appreciation will be higher for the smaller plots; it is easier to get 100 per cent return on an investment of ₹10 lakh than on ₹50 lakh. Second, borrow to buy land only if you cannot finance the purchase with your savings. Why? You will have to pay interest on the loan; cash flows will not be generated till you sell the land.

Finally, remember — investing in land gives the illusion of lower risk because land prices are not available real time. That said, owning a physical asset is emotionally satisfying.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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