Plots VS Apartments & Shops. Which one is better and why?
In this particular scenario we would like to put the bottom line first i.e. plots are not a good investment option when compared with any rentable apartments or shops.
This is of course unless you are buying a plot for your personal use at a later stage. Even in that case, there can be investment opportunities that will beat your ROI on plot’s future value. Another reason is that a plot is a non-productive property that is not adding any value to your, society’s, worker’s, or country’s development. This is a property that you hold onto in hopes that it will appreciate in price and return you capital gains or save you a certain amount if you were to buy a similar plot in future to build your own home.
Projecting Capital Gains and Rental Yield
To further understand this, consider this hypothetical scenario: you buy a plot today in a certain society and expect it to double in its price over a period of ten years. In that case, your average price appreciation per year would be 10%. Once you sell this plot after ten years and receive double the amount you had invested, you have only been able to protect your capital against the prevailing average inflation rate of 10%. You have not made any money in real terms.
Conversely, consider the smallest shop or kiosk in a mall that you could manage to acquire with the same capital. Considering that it could be rented for a rental yield of 0.5% of the property value, and appreciated by 10% every year in terms of its price; you not only successfully beat inflation but also accumulate significant passive income over a period of ten years.
Let’s suppose both the shop and the plot were priced at 10 million PKR. The breakdown of return on investment for each over a period of ten years would look like:
Property (costing 10 million)
Rental Yield @ 0.5% p/m^
or 195.6 million
* The Price of both the plot and rentable property are projected to increase at 10% annually.
^ Rent is projected to increase at 10% annually under the prevailing norms and these rental projections are not catering for vacancy rate, taxes, and maintenance cost.
While you may stand to gain 10 million or a 100% in absolute terms over a plot purchase and holding period of 10 years; the same returns for a rental property would be 195.6 million or a whopping 1956%!
With this simple projection, we leave you to decide whether a plot or a rentable property is better.