Is real estate a good retirement plan? Suggestions?
There is no doubt that Real Estate creates wealth for the already rich! For a Raheja, or a Hiranandani Real Estate has generated a lot of wealth. However, in this case, I am not going to suggest staying on this portfolio. Here are the reasons.
Sir, you are 55 years of age and have a daughter who is settling down in New Zealand. Chances of her coming back are close to nothing. So it means you and your wife have to handle your portfolio all alone.
At your current net-worth level you will be able to retire, but you will need far better cash flows. We have just seen that your RE portfolio is worth about Rs. 8 crores. However when we tried to get a quote for selling we did not get offers beyond Rs. 6.2 crores. So let me re-do your rent.
Rs. 60,000 MINUS Rs. 7000 per month maintenance. However in your case this has become Rs. 540,000 minus Rs. 84000 i.e. Rs. 454,000. Well this is far less than Rs. 720,000 minus Rs. 84000 = Rs. 636,000.
Your second house of Rs. 30,000 also has a monthly outgo of Rs. 4500 per month. This means 25500*12= 306,000 Rs. and your third house has a rent of Rs. 20,000 also has a monthly outgo of Rs. 3000 i.e. 17000*12 =204,000.
First of all your cash flow from rent has been recast, and I am not sure how much of this will be sustainable. Let us take a 20% discount to this too. That will perhaps be a sustainable cash flow. It is impossible to guess the rent flow on a regular sustained basis. So let us take this number as the sustainable cash flow.
Real estate is a very difficult to manage for an older person. So it is not something that I would suggest you should have at an age beyond the age of 65. So RE is out – it has nothing to do with return, it has something to do with ease of managing a portfolio.
My suggestion is simple. The biggest property goes out first. I know it looks difficult to sell – let us put all the 3 flats for sale with a target price. Since we are not in a hurry to sell we will not sell in desperation. We will speak to only one broker – and give him a target price.
Even if you want to give a house on rent, we will buy a house in Bengaluru. It is very tough to handle a property so far away.
As soon as one property is sold we will create a mutual fund portfolio with large cap, mid cap and small cap allocations. Some part of the money will go into REC bonds – to reduce the tax liability. So there will be no debt fund allocation.
From your current income we will be doing a SIP of Rs. 1L pm.
No, you will not leverage to buy another flat. On a net worth of about 8 crores why would you leverage Rs. 2 crores?
Also your portfolio of 4 flats in one suburb of Mumbai is too concentrated. Once you put say Rs. 3 crores in equity funds, your portfolio gets better balanced.
When you sell the second flat (say when you are 62) we will invest it in an annuity plan. Of course it is very inefficient – I would hate to buy it myself – but it ensures that in case you live till 120 years…you still have an income!
The third flat gets sold last – maybe at your age of 65 – before you leave for Bengaluru – and it translates to some debt funds – or REC bonds.
At your age of 65 years your portfolio has to look manageable – and that does not look RE. So it has to be Mutual funds, Annuity, bank fixed deposits, and savings bank account.
If you must have RE, it has to be given to some friend or relative not to some unknown tenant.
trekkersid
I did try to post this yesterday in the original article but seems it didn’t go through. Attempting again.
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 doesnt 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 bequeth 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 counter productive. 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 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 doesnt 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 simplyfy 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!
Raj
trekkersid Kudos,
Comment was very thorough and informative.
Think you already have a blog.Can you share it with us?
If not, please start one… we need you to..
Many Thanks.
Water Boy
IMHO, the daughter should be consulted once…
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