What is a Real Asset?
13 November 2022
"Accumulating assets will make you rich.” is a phrase you would always hear...."
Accumulating assets will make you rich.” is a phrase you would always hear in a discussion about getting rich or becoming financially free. An asset that puts money in your pocket will make you rich. So, is there an asset that can take money out of your pocket? Well, yes.
The financial definition of an asset is, “a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit”.
So, the asset you are holding might be earning money for you or not, but there is an expectation that it will, someday if not today. Anything that you own can be thus classified as an asset if a hope of earning money is associated with it. This hope may make us own assets that actually don’t lead us toward financial freedom.
Assets like a house, an expensive car, or a private jet will not put money in your pocket OR increase your cash flow. You would ask, why?
A house needs maintenance. Fixed electricity costs, water tax, property tax, and a lot of other charges that you have to pay to the government just to maintain a house. Moreover, there are eventual repairs and works that need to be done inside the house.
This costs a lot of money just to own a house. Now, if this house is not rented out, then the costs have to be paid by the owner from her own pocket. This leads to negative cash flow or outflow of money.
An asset is something that puts money in your pocket. - Robert Kiyosaki.
Now, if the asset is not leading to an inflow of cash then it is a burden and would take you in the opposite direction of financial freedom. You can argue that by selling the house after a period you can gain good returns on your investment. However, this is subject to a lot of conditions. The property rates are volatile and the average appreciation in non-commercial properties in Bharat varies between 4 to 6%. Now, that does not even come close to the average inflation rate of 7.5%.
So, while spending money for the maintenance of the property, you are simultaneously losing your investment to inflation. You have thus found a way to lose money in two ways. This doesn’t sound like a sound investment, does it?
Now, let's talk about renting out the property that you own. The average rental yield for residential properties in Bharat is 2-4% the rental yield in Tier 1 cities in Bharat is as follows;
Bangalore - 3.45%
Mumbai - 2.44%
Ahmedabad - 3.22%
Chennai - 3.10%
So, if you invest ₹1 crore in Bangalore, which by the way has the highest rental yield among these cities, then you would recover your initial investment in 29 years, and then you start getting returns on your investment.
Now about expensive cars, airplanes, or other vanities (yes, an expensive car is just a vanity!). They need a lot of maintenance and you need staff to manage your stuff.. And the cost increases every year.
These assets even if rented, except for commercial properties, would not help increase your cash flow and in turn be less advantageous than other investment classes like stocks, cryptocurrencies, Futures and Options, precious metals, and the commodities class.
The average gain on index investment in Nifty 50 would get you a decent 12-14%. This beats inflation as well as earns you money. Commercial property in a decent market area in Bharat could make you an 8-11% return.
So, next time remember this blog when you call buying a house, car, or jet a good investment. And what are real assets then? Those that put money in your pocket!
1. What is an asset?; here
2. An Introduction to buying commercial property in India; here
3. What is Nifty 50 index?; here
4. Why is rental yield one of the lowest in India?; here
5. Real Estate inflation rate in India; here
6. Inflation rates in India; here