Published Article Details

Should you buy a plot as an investment?

Posted by: Arti Bhargava on Dec 18, 2017, 06.30 AM IST

Mayank and Priya Mehra are not big savers, though they are close to 35 and have been working for over 10 years. The lifestyle choices they have made cost a lot of money and they are unwilling to cut back on expenses. While they are not servicing any long-term loans, they are not averse to borrowing money in an emergency. A friend has advised them to buy a plot of land on the outskirts of the city as an investment and develop it as a holiday home with the help of a bank loan. The idea appeals to them, since it would mean a compulsory saving to repay the loan and acquisition of an asset. Should they go ahead and buy the plot? 

If the Mehras have limited or no assets, beginning with a large, indivisible asset such as a piece of land is a bad idea. It may be prudent to build liquid assets in deposits, mutual funds, bonds and equity first. These assets can be sold in parts, if there is a need for money. They can also be used as collateral if a loan has to be taken. There is a psychological satisfaction in owning a piece of land whose value is appreciating, but it translates into little or no value in day-to-day living. 

If the idea is to create an asset (land) by allocating a compulsory monthly saving in the form of an EMI , a systematic investment plan (SIP) in a mutual fund will serve the same purpose, albeit with greater flexibility, liquidity and no interest component. They can skip an instalment if they have a problem; they can draw from the investment in case of need; and the value of their investment will also appreciate over time. A loan against the land is highly inflexible in comparison. 

Moreover, buying land may be extremely tax inefficient. Unless they actually construct a house on the land, they will not get the tax benefit on the principal repaid or interest paid on the loan they take from the bank. The Mehras should consider other investments instead, or buy a flat in which they could live, if they are keen on acquiring property as an asset. 

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