One over-rated strategy of investing for retirement is to buy properties and give it on rent. Collect rent (which is indexed – the rent rises along with inflation). Nothing says passive income like an investment property. Buy the property, find tenants, and watch the rent roll in. Sounds so easy, does it not? What are the caveats?
Big investments required! Buying and owning investment properties requires a lot of high leveraged investing. You have to make a serious amount of down payment, take enough term insurance cover, pay charges of holding the property, not only do you have to cover the down-payment, but you’ll also have to cover other closing costs. You’ll need to know how to buy, rent, and manage these properties. You will need the help of good brokers and the brokerage costs eat into your yield returns.
With interest rates exceeding 9% today, the cost of buying property has gone up. This means that a lot more has to go right today than if you had bought when rates were say 6%.
Getting good tenants. Assuming you have the money and some skills, you would still need to deal with finding and managing tenants. New properties also depreciate and you will have to deal with the ongoing costs of servicing them and dealing with tenants who won’t pay and won’t vacate the property!
Find a real estate manager. If you don’t like dealing with tenants, then your solution is to find a property manager (broker) to do it for you. However, finding a good manager may not be that easy!
Locational and Concentration Risk. As we end up knowing one location and we buy a few properties, we tend to buy in one location. This leads to location and concentration risk. While investing in equities, we invest in mutual funds instead of building our own direct equity portfolio. REITs are not such a great idea in India!
Owning investment properties has lots of benefits, but there are no tax benefits (rent is mostly taxable). Long ago, it made sense to make tax losses and set it off against other income. This is now history.
Almost all Real estate brokers and builders will tell you that you cannot lose money in Real Estate. I have seen too many people lose money in RE. As your age increases will you have the energy to collect rent, pay the electricity bill, society charges, look after the upkeep –when it lies unoccupied?
Real Estate as a tool for generating retirement income is not a great idea in India. Imagine a property worth R1 crore is what you have. Selling it and putting it in the bank will get you about R10 lakh as interest, and will get you R2-3 lakh per annum as rent. This is NOT at all attractive for a 75-year-old person. It is fine for a 55-year-old person who has other taxable income. Also after the age of 70 do you want to really ‘manage’ anything? Would you not prefer a more passive portfolio?
PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C40 a day’