What Most Financial Advisors Get Wrong About Real Estate

In the world of wealth management, real estate often finds itself caught in polarized opinions. Many investment advisors tend to lean towards financial assets - mutual funds, stocks, ETFs - and frequently downplay or even dismiss real estate as an inferior or overly risky investment. While it's true that real estate comes with its share of complexities and Indian households are overly heavy on real estate, a blanket dismissal is clearly misplaced. In reality, when approached strategically, real estate can be a valuable component of a well-diversified portfolio.

1. The Psychological Safety of Owning a Home

Morgan Housel, in his bestselling book The Psychology of Money, points out that not all financial decisions are made with spreadsheets—and that’s okay. The emotional value of owning a home goes beyond return metrics. For many, a primary residence offers a sense of stability, identity, and psychological safety. It provides permanence in an unpredictable world and serves as a tangible asset that anchors financial and emotional well-being.

2. The Power of Holding for the Long Term

Unlike stocks or mutual funds that people are tempted to buy and sell frequently, real estate naturally lends itself to long holding periods. This behavioral advantage allows the power of compounding to work uninterrupted. It avoids the common investor pitfall of buying high and selling low. As a result, real estate investors often benefit not just from price appreciation but also from capital preservation and long-term gains.

3. Leverage: A Double-Edged But Powerful Tool

One of the most unique advantages real estate offers is the ability to use leverage. Few other asset classes allow investors to control a high-value asset with a fraction of the capital upfront. Whether it's a low-interest home loan or a construction-linked payment plan, judicious use of leverage can significantly magnify returns.

For example, if you buy a property worth ₹1 crore with just ₹20 lakh as down payment and the property appreciates to ₹1.3 crore, your return on invested capital is 50% (excluding costs and taxes) - not just the 30% appreciation. Of course, leverage needs to be used wisely, with careful attention to interest costs and liquidity.

4. Tax Efficiency Through the Income Tax Act

Sections 54 and 54F of the Income Tax Act can be a game-changer for real estate investors. These provisions allow for capital gains exemptions when proceeds are reinvested in residential property, enabling investors to compound wealth tax-efficiently. Thoughtful tax planning can significantly enhance post-tax returns from real estate.

5. Real Estate is a Micro-Market

One of the most common mistakes is treating real estate as a monolithic asset class. In reality, it is hyper-local. Returns from real estate vary dramatically across cities and even localities. Using national-level indices like the Shiller CAPE Housing Index to make a judgment is not just misleading, it is missing out on rental yields (minus the cost of maintenance).

Cities like Bengaluru, Pune, and Hyderabad have outperformed the national average over the last decade due to IT growth, infrastructure development, and demographic trends. In contrast, some Tier-2 cities or over-supplied markets have stagnated. Like equity investing, location selection is critical in real estate.

6. Vested Interests

While SEBI RIAs don’t have this problem, some advisors who work on commission may have a vested interest in moving the money to financial assets. Investors should be wary of such advice and ascertain if a vested interest is at play when dismissing the real estate asset class.

7. Real Estate Can Belong in a Portfolio – With Caveats

At Wealth Beacon, we believe real estate can and should have a limited place in an investor’s portfolio - but not unconditionally. Returns from real estate are influenced more by entry/exit timing, location, and the use of leverage than by the asset class itself. Poorly timed or emotional purchases, especially driven by FOMO (Fear of Missing Out), can be financially and emotionally draining.

If you’re considering real estate:

• Consult your financial advisor before making large allocation decisions.

• Avoid FOMO-driven purchases.

• Stick with reputed developers in high-growth corridors.

• Plan your entry and exit thoughtfully.

• Ensure you have the holding capacity, since real estate is inherently illiquid.

• Control the percentage of net worth invested in the real estate asset class.

Summary

The debate between real estate and financial assets doesn't have to be an either/or decision. Real estate, when evaluated correctly, can serve as a stable, long-term growth asset with unique benefits - psychological, financial, and tax-related. What most advisors miss is that real estate, like any investment, is not good or bad in itself - it’s the strategy behind it that determines the outcome.