Is real estate a good Retirement Plan?
I am planning to do a book on “Questions Doctors ask”. Here is a question which a doctor has asked. I have given a very long answer.
Here is the question in great detail…I will answer it in a day or two
“Subra I am 55 years of age and I have 3 houses (apart from the house in which I live). I have given them on rent and the rent that I receive from the 3 flats are Rs. 60,000, Rs. 30,000 and Rs. 25000 – per month. I expect this income to increase by 10% every year and get me Rs. 200,000 per month from my age of 65 when I retire. I am a doctor and my spouse is a housewife. My only daughter is studying in New Zealand and is planning to marry a New Zealander and settle down there.
Luckily his wife was also there and she said “He says Rs. 60,000 per month…but it was lying vacant for the past 4 months..it is only now that we got a new tenant. Not sure how long he will stay here.”
His monthly income was Rs. 175,000 and his monthly expenses were about Rs. 100,000 – including society charges of 4 houses, etc.
His wife was a second holder or first holder in all the flats and one flat was in the daughter’s name
He had about Rs. 1 crore in bank fixed deposits – and it was soon to be converted into another real estate – you guessed right – a residential flat in the same suburb – Kharghar (Navi Mumbai).
He thought it was a perfect retirement plan. He was going off to Bengaluru after retirement – and would fund a purchase of a flat by selling the current flat in Kharghar where he was staying and practicing. He was planning to make that move at his age of 65 years and then hang up his boots.
What would be your advice?
Anand Sharma
I see a few issues with this retirement approach –
1. With old age, it will become tough for him to look after all these properties (esp. since his child is also not within the country to help him to do that).
2. There will be times wherein his rental income stream will dry up. There is especially too much reliance on rental income from just one of the houses (the 60k one)
3. Rents might not increase in proportion to inflation as the properties grow older
4. Lack of liquidity to handle emergencies etc.
5. Lack of asset class diversification
My recommendation would be too sell some of the real estate and diversify into equity / debt.
Aditi
I wonder if he could be convinced that real estate gives 1-2 percent Yield and fixed deposits give 5-7 percent and are liquid and hassle free
Karthik
Sell all properties and invest in a mix of equity and balanced funds and start withdrawal only after 70 years..FDs shift to few debt funds.. try to work as long as possible.
Vikas
It will be difficult to look after real estate from long distance. He should sell all real estate, buy an apartment in Bangaluru to live in, buy annuity to cover for expenses till 80 years of age of self/spouse, buy a very good medical cover for both immediately, keep around 10 lacs in emergency fund, move rest of money to index fund which can be tapped at age of 80.
He should also think about doing some practice for charity after moving to Bengaluru.
kamalgarg1958
Sometimes, I find the comments and even sometimes the experts’ advice on real estate as not proper. The rental yield in any part of this country for residential properties is roughly 3 to 4% and not 1-2% as mentioned by someone over here and for commercial properties it is 7 to 9% (unless you take very hefty deposit of say, 3 to 5 years rent as deposit). The best part for real estate investment is that it, by default, is for long term because of various eccentricities of real estate market including the fact that there is no firm price on any given day, there is huge price differential based upon location, direction, vastu compliance and type of use and so on and so forth. And due to all these innumerable factors, you end up holding that investment for a very long period, say, for 15 to 20 years and that’s where you make huge return. In my opinion, unless somebody has bungled up buying the property at an astronomically higher price (and if you are holding 4 properties as in this case, to assume that all the 4 properties were bought at the peak of the real estate cycle is too much), you still end up getting a decent capital appreciation of roughly 10 to 12% CAGR.
To add price appreciation of 10 to 12% CAGR and the rental yield of 3 to 4%, you end us earning 13 to 15% CAGR which is not too bad.
Now, in this present case, since the person is shifting to Bangalore and due to his increasing age and of course the hassle of maintaining the property, keeping a watch on it, issue of finding a tenant after every 11 months or so, the Doctor should sell all the properties one by one over a period of time and then invest part money in liquid funds to take care of routine monthly expenses and balance in either Hybrid Balanced Fund or even Diversified Equity Fund.
trekkersid
Here are my ten cents. At the first glance, the doctor looks pretty much covered for his retirement & is set to sip cola on the beach. However, if we peel the layers and delve into the pragmatic aspects, here are some observations.
Maintaining real estate for a long period of time (to get a regular cash inflow) is a challenging proposition. There are some caveats that need to be considered. And am sure, more the number of real estates, 3 in this case, the trickier
it is going to get, further out in time.
1) He consistently needs to find tenants for all of his properties else the cash inflows will be impacted. Easier said than done. The rent should be ‘fair’. He will not always get the price & security deposit that he demands. He will
have to possess or get smart at negotiating skills. These days, tenants are savvy and do a nice bit of homework. Most importantly, he has to be lucky to get good tenants who pay on time and dont create nuisance to you and neighbours in
the society. Mental peace is the key, especially in retirement. It may be virtually improbable to identify ‘good’ tenants, no matter how smart you are. Dont go by what the broker says, his sole interest is to pocket the commission.
Period. I have seen tenants doing all kinds of things like partying late night (even families, they are called get-togethers!), ramming their cars in the compound walls and then saying that it was an accident and they will not pay for it. Guests visiting tenants and overcrowding the elevator which gets stuck in the shaft creating a ruckus. The owner may have to foot the bills, mental & monetory. These are some simple examples and things can get uglier. That also entails that the doctor needs to find a very good, professional, dependable & trustworthy lawyer by his side all the way.
2) To expect a 10% increase in the rentals YoY is aspirational but in the real world quite tricky to achieve over the long period of time. The ‘discovery’ of the rentals is quite ad hoc with no specific underlying mechanism.
3) Property taxes, maintenance charges, part of the rental agreement charges, sundry expenses, big maintenance works once in a while like painting, electricals, leakage, AirCon, house cleaning etc (which we would call phantom costs) will have to be borne by the doctor. Not only that, he has to himself arrange for these contractors, painters, plumbers, supervise them & preferably will have to make a long term agreement, understanding with them regarding a fair price else his net cash flows would be eroded big time.
4) The doctor is planning to stay in Bangalore and manage his properties in Mumbai. This is no child’s play. Either he will have to travel very frequently (cash flow & health erosion), to & fro or create a power of attorney on someone else’s name to manage the properties and their upkeep. Given that his only daughter is based out of NZ, for the good, adds to the conundrum. The other option he has, is to employ a real estate firm which will manage everything but will take a generous cut. He will have to do actual calculations of how much would be his yearly net cash flows after tax, commissions, expenses in both cases, self managed & outsourced.
Now, looking at the above three points in the light that, as he ages and marches towards 100 (he and/or his spouse, both), his physical & mental capabilities will start waning slowly and all the above activities will be more challenging to perform & execute on a regular basis. I have probably portrayed a picture which is more than a couple of standard deviations from the mean but that is exactly what we want to account for. Its not that real estate is a bad idea, it is just that he has to take an informed & practical decision knowing the pitfalls along with the rosy picture (receiving three cheques/NEFTs on the first of every month for the next forty years).
So what other options does he have?
He may want to get rid of his real estates one by one over the next decade so that he doesn’t end up being a distressed seller. Expect fair prices and not get anchored to a specific figure in mind. The downside is that he will have to pay the long term capital gain tax but then we presume that he is not going to cling on to his real estate forever and there is no progeny to bequeath to apart from his only daughter who already has one flat on her name. So why not bite the tax bullet now rather than later? Technically, he can save the tax by investing the profits in another real estate but that would be counterproductive. Remember, liquidity is the key in retirement. As & when he sells the properties, invest the proceeds (after tax) in a healthy mix of debt and equity and defer the tax. The asset allocation depends upon the absolute amount of proceeds, his monthly expenses and the rate at which they grow (inflation) and his risk taking ability. Obviously, the money which he expects to use after 10 years can go to equity which means index fund or large cap/giant cap equity mutual fund, growth mode in direct capacity (no distributor). Direct equity doesn’t make sense unless one is a professional or is deeply passionate about getting one’s hands dirty (doing the necessary research). The balance can go to ultra short, short and liquid funds. At his age of 70, 75 and 80, he would want to buy annuities to further stabilize his cash flows. At about 80, he would want to consider relocating to a geriatric care center. The essence is trying to simplify things with age.
I know there are a lot of moving parts and not everything may be achieved but the approach and mindset is important. Amen!
Krish
There is more to the story than just looking at the numbers. The whole IFA is hell bent on only one thing i.e. get it into MFs as panacea for financial freedom. The Indian psyche is no one will ever reveal their liquid bank balance if some one has huge amounts per say. It does not give social uplift in the society. Where as RE ownership gives that pride feeling in community. Also not many has plans post retirement and they don’t want to confine to 4 falls keeping all the investments in instruments with ‘do nothing’. Renting provides some interaction with other human beings and time kill. After all we are social animals and want to be interacting with someone or other with one pretext or other.
SS
Hi Subra Sir,
The capitalization of rents @ 3% rental yield tells me that The real estate worth will be 4.60 crores. There is 1 Crore in bank FD. It is about 5.60 Crores. If he plans to retire and his only daughter is in New Zeland (settled for good there), then for the Sr Citizen there is no need to choose a Tier-1 city for leading a retired life. You could retire in Tier-2 Mysore for eg. But that is a personal choice.
When you are alert, it is advisable to sell the properties:-
It has benefits: Money is liquid and at your disposal. You save on the manit, property taxes towards these 4 properties. Plus you save on effort and pain to manage these at this age.
It has pitfalls too: (i) Capital Gains Tax on sale of real estate (to extent of 3 properties), (ii) and other government expenses will apply. You have to sell in staggered manner OR sell it as stock-in-trade. Then, You would also buy one in Bangalore/Mysore etc say 60 Lac. (iii) You will not get capital appreciation or rent appreciation now
Let the 1Cr be in FD continue as it is and let us assume the interest from that is needed for day-to-day expenses and lifestyle. Invest the rest of 4 Crores in Mirae Balanced Fund (your favorite sir 🙂 ) and continue to engage yourself in medical practice, coaching or visiting doctor etc in Blore/Mysore to cover some costs as long as you can.
ASHOK
When no one is there other than him and spouse to take care of his properties after retirement, it will be a very tough job.
It is better to sell the properties in the Mumbai and put it in FD/Liquid or Debt funds and live peacefully.. It is advisable to move to Old age Villas at Coimbatore or Mysore which takes care of food, shelter, luxury, aged friends, medicals,etc.,
Leopold
Everyone is suggesting for selling the property but will those properties be sold in these dull times? Will he get the customer ? And most importantly will he get the market price or his asking price?
Ankit
It is better to sell all the properties in the Mumbai, keep 1 flat for purposes of self occupation in B’lore and put all money in PPF/Annuity/FD/Debt funds.