Sorry I had totally missed out on this earlier. And yes I agree - Maths is the real answer to most real things - Stocks or Real Estate.
So here is my Math - hope you agree on the numbers
Cost of House Purchased - Rs 1.4 crores (NO CASH - ALL OFFICIAL)
Housing Loan from HDFC - Rs 70 lakhs
EMI on Housing Loan - Rs 67368 per month
Rent received from the House - Rs 71,000/-
Maintenance Cost (Society Maintenance) - Rs 2,100 per month
Net Inflow from this arrangement - Rs 1,532/-
Current Realizable value - Rs 2.25 crores (Last transaction of a flat in the same society happened in November 2014)
Total Appreciation - ~60%
So with Rs 70 lakhs of my own I now an asset worth ~Rs 2.25 crores over 3 years. I do understand the difference in asset classes of Stocks vs Real Estate. But I re-emphasize that market volatility and stock picking are not really an easy thing. Stock markets have seen falls in many years while real estate prices in most Metros have virtually never fallen! Also there is tax break on interest on EMI at least in India. So not all rent income is taxable on a net basis.
There are a few problems in the way you are seeing things. First, your 70 lakhs are not quiet 2.25 crores because you still owe mortgage (which is not entirely paid over 3 years). Also, there may be sales fees and commissions that you have to deduct from the sales price. Next, you have to deduct capital gains tax on the amount of gain (I don't know much about tax structure but you may have to consider this factor in your calculation). I don't know the mortgage terms, but a 1.4 crorers purchase price with 70 lakhs down payment and 70 lakh loan amount may end up becoming 2 crorers overall because you pay interest on 70 lakhs loan (because it is not 0% interest loan. The actual amount you will pay is 70 lakh principal+ interest > 70 lakhs that you are assuming). The actual math will require inflation adjustment. Also, you will pay taxes on your rent income so depending on your tax rate (in some cases rent income may bump you up into higher tax bracket), net income of 1,532 is on the higher side of estimate (The tax benefit of EMI will become lower and lower in time because typically you pay a lot of interest in the beginning years and then principal becomes the major portion of the payment). Also, what about property taxes (is that what society maintenence is?). Additionally, there is some uncertainty that may get created in terms of financial solvency of tenants. What if for some reason, tenants lose their job and are unable to pay rent? Would you hire lawyers to evacuate them? After evacuating, you may end up spending money marketing your flat for rent. Your tenants may do well financially and may buy a flat of their own as well and vacate your flat. There are maintenence costs with a house as well (plumbing, drain jams, wiring, etc.). If you are providing furnishings (Refrigerator, A/C etc.) then there may be servicing issues & costs. Usually, you will have to do some "make up" on flat once a tenant leaves to make the flat attractive again for renting (if there is a competition in the area). I am ignoring home insurance costs and other things like regular wear and tear costs (tenants kids drawing things on the wall of your house, fixing a leaky roof, monsoon rotting wooden window frames every 15 years, kids breaking window panes, etc.).
The most important problem is--- you are working for free as a landlord. Collecting rent, advertising, fighting (in case of trouble), arranging for flat servicing, etc. takes your time and energy. There is an opportunity cost for all this additional work. Also, the committment of monthly payments severely impacts your lifestyle. If you have your flat vacant for 2 months, you will be miserable arranging approx. 67,000/month to keep up with your PMIs. Depending on your financial situation, you may end up renting it at a lower price out of sheer necessity of avoiding financial misery. Keep in mind that what you can charge as rent also depends on how many new units are built in the area. The excess inventory may just kill the amount you can charge in rent in the future. This is one aspect that you may not be able to control well. If property prices are really rising fast then builders will build new units as fast bringing down real estate investment growth rate.
You don't have these issues in stocks/bonds investing, and you also get benefits of compounding. Dividends from stocks are taxed at lower rate and are not treated as regular income (like rent income) this gives some tax efficiency as well. There is uncertainty in regular investing, but it can be managed by indexing and diversifying to a point where uncertainty in portfolio management is equal to uncertainty in tenant management.
On your comment on stock market prices have fallen and real estate prices have never fallen. Well, this is not a fair comparison. Stock market has also never fallen. Just go back 20 years and make that comparison of Sansex index and real estate. The problem is that you get stock market prices every day and then you can see them high and low. If you get to see your home value price everyday then you will see similar ups and downs. One thing I can agree with you is that stocks have higher volatility than real estate. In other words, over the short term, stocks will be more riskier than real estate. But do people buy real estate for short term? The answer is no. Over long term, stocks generally do better than real estate.
Some of the price drops in stock prices are legitimate. Every time a stock pays dividend, its price drops (if you reinvest the dividend then it actually does not drop as far as your wealth is concerned because while price drops your number of shares increase). Looking at price alone does not necessarily mean that your worth has decreased by as much as the price drop shows. This is a hard concept to understand if you only look at prices.
In reference to stocks, I don't consider stock picking because it is easy to look back and pick a winner to show that stocks can easily beat real estate. I stick to major index and market timing is not a concern there. Here is a table of Sansex returns <
http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3 >. You can see that by this year's Nov. it gave about 38% return of first 11 months. While it is a short term return, you can look at 10 year or 15 year averages and they are always positive. The last three year average from the table is 17.67%. Had you invested your money in Sansex then you would have gotten (1.1767)^3 = 1.629 or 62.90% return. Even for this short term, your real estate investment (despite inflated numbers due to not accounting for all aforementioned costs) falls slightly short. Of course, over the short term you may be able to make a case for higher real estate returns (in part due to volatility of stock prices). However, the case gets harder when you consider longer periods because of the benefits of compounding over longer time period are really hard to beat. Since you don't borrow money to invest, risk of financial misery in stocks/bonds investing is much lower. In other words, there are not PMIs to worry about in stock investing.
There are other "qualitative" costs of owning the home as well that most people don't see. For example, you may be reluctant to move to a distant place that pays you higher salary just because you own a home and collecting rent will be difficult should you move elsewhere. Owning a home may, in some cases, reduces your lifetime income. Of course, people don't consider these things, but ask me and I will tell you the truth. It is certainly not the best investment. You end up compromising a lot and compromising is one thing I don't like.
Of the flip side, some people take home equity loans that allow them to borrow money at lower interest rate (to fund children's education, etc.). However, you could borrow against your stocks as well (margin loans). These interest rates will be lower as well but not as low as home equity loans. A minor factor there is that interest on home equity loan may be tax deductible and margin loan interest that is not used for investment purposes is not tax deductible. However, if you are married with children then it is difficult to qualify for home equity loan interest tax deduction. Most of what I said in this paragraph is based on US tax code but some of it may apply in India.
In summary, computing the real return of investment on home is way too complicated. Simple calculations are not suffice to make a case that real estate investments give higher returns. Most people may get attracted to it just because these are low risk low return investments. If real estate starts giving high returns then builders will increase inventory thereby increasing their riskiness (of prices) as well. Once prices start become risky, investors run away from these investments and builders have to drop prices and stop building homes until an acceptable risk-return equilibrium is reached. The risk return equilibrium for stocks is always higher than that for real estate. For bonds it is generally lower than real estate but sometimes it could be higher or lower as bonds could be corporate or government and then they also get ratings on their riskiness where high risk bonds are required to give higher yeilds. You can always construct a portfolio of stocks and bonds that is equivalent to real estate in terms of riskiness. This portfolio will give higher return than real estate because of compounding effects that you get in financial securities-- over the long term that is.
There are other risks in buying home: <
http://political-economy.com/risks-of-buying-a-home/ >. The biggest one is-- bankruptcy risk. If someone loses the job and cannot make payments then it does not matter how much you think the value of home is. The bank granting you the loan will sell it to the first person that gives an offer. In the case of this example, given the mortgage, the decision to sell the home is that of Bank and it will not wait to get the right price for the home.
While most real-estate proponents like to throw numbers, the fact remains that real-estate is very difficult to sell. In India, sales velocity for best real-estate market is 3% (see page 15
http://www.liasesforas.com/Reports/Sample_PPT.pdf ). This means that if in the beginning of month 100 flats/homes are available then at the end of the month only 3 out of 100 will be sold (in a healthy market). The reason is that homes cost a lot of money and there aren't rich people sitting around trying to buy real-estate. It is easy to see a sold house and believe that you will sell your house as soon as you want to sell it but in reality this does not happen. You take a risk of sitting on a house that you want to sell for several months when you need the money immediately. Even if you drop the price of the home even then there is no guarantee that you will find buyers because of 3% sales velocity. As your home gets older, it will be harder and harder to sell, in part because of new homes that are being built. So in time, returns from real-estate get more tepid.
Also, look at this for details of math that shows that the house you bought for 1.4 crorers is not quiet that amount because you pay interest in loan and it may actually cost way higher <
http://beginnersinvest.about.com/od/realestate/a/aa022407a.htm >.
It is rear that you will find investors that are sole real estate investors or stock & bonds investors. Most would include both, so if you haven't then you should consider it.
