Food, Clothing, Shelter and Medicine

A few years back, when someone recommended that I buy real-estate, I would ignore them. I believed that real-estate was in a bubble, and all these people investing in property would get their just desserts. This has been a big cause of debate in my family, especially with my in-laws. When we were thinking of buying our house, I was not convinced that it was a good idea.

Flash-forward 6 months.

I now have a more nuanced take on all of this. I think investing in the RIGHT property WITHOUT debt is always a good idea. Let me explain what is investable real-estate. An investable property is one that immediately begins to generate income for you.

This test immediately eliminates:

1. Any property that is an empty piece of land (unless it is agricultural land).
2. Any real-estate like an apartment that a builder is yet to build (say will be done in 3 years, but builder wants a deposit now)

As long as you can immediately rent it out, it is just like keeping money in the bank (which earns interest). It is possible that the rate of return with real-estate is lower than a bank, but I believe it is a safer investment than a bank. This is because real-estate is a better hedge against inflation as long as you buy it WITHOUT using any debt.

Why is real estate a good hedge against inflation?

1. If inflation runs high, the value of your savings in your bank (the principal) will be reduced. Not so with real-estate, where prices will likely rise with inflation.
2. Usually, when inflation runs high, interest rates on loans rise - but not necessary that the rates on savings accounts will rise by the same amount. However, you can be guaranteed that your rent will also rise. Note that in case of inflation, consumption of goods actually falls. But essential commodities like food, clothing, shelter and medicine continue to hold their value.

That's all fine and dandy, but what happens if the rental income falls? There are two scenarios to consider:

1. There is a global decrease in rents: Rents fall across the country, or across the world. In this case, not to worry, because your other expenses will fall accordingly (there will be deflation, not just in rents, but everywhere). You'll still earn enough from rent to maintain your standard of living.
2. There is a local decrease in rents: It is no longer a desirable area, etc. Well - when you're looking for a good investment, you have to make sure that such local factors do not exist, and that it will remain desirable for many decades to come.

Basically, in uncertain times, you always hold investments that generate a rate of return, and are guaranteed to maintain that rate in the face of inflation or deflaton. Investments in food, clothing, shelter and medicine fall in that category.

Of course, this is me being conservative. There are good investments in things like transportation (that help food to get from one place or another), energy (which is also basic commodity), and even technology (because technology helps optimize all complex systems like transportation, energy, etc).

But if you buy real-estate, remember two rules

1. Location, Location, Location: Buy at a desirable location.
2. Buy something that can generate rent immediately.

I would pay lesser attention to the price that you pay for the apartment as LONG as you do not use debt.