Real estate has been an evergreen asset class for investment. Tier-2 towns and the proposed smart cities will drive the next phase of growth
Everything about retired life is good except the lack of regular income. Obviously, people save, invest, and insure to have a stress-free retired life as far as finances are concerned. For investment, most choose fixed deposits, mutual fund through SIP (systematic investment plan), or sometimes, even insurance.
Real estate is another asset that finds favour when it comes to retirement planning. This asset class gained interest in India after the economic liberalisation and has witnessed appreciation in value since then. However, in the last couple of years, as the economy has slowed down, the efficacy of investing in real estate for retirement has come into question.
Real estate in retirement planning
Real estate can help in retirement planning in two ways. First, the investor can buy the property at an earlier stage and sell it after retirement, thereby realising capital gains. This will lead to surplus money in hand for his retirement needs. In other cases, he or she can lease the property out on rent and earn regular money to supplement the pension income, if any. In foreign countries, there are also Real Estate Investment Trusts, or REITs, where investors can invest and earn regular income. REITs have been very popular in overseas markets, but are yet to be launched in India.
Advantages of real estate investment
Real estate is the only asset that provides regular monthly income. It provides the scope for increase in rental income to keep pace with rising inflation. No other asset provides such inflation-neutralising advantage. The owner has complete control over the asset.
There are times when your property will be vacant. Despite zero rental income, you have to pay mortgages and spend on maintenance and upkeep of the property. This is not an easy task if you stay away from the city where the property is located. Real estate properties require large sum of money. Hence, if for any reason you want to sell it, you may not find a ready customer immediately. Moreover, if the market is subdued, you may have to sell it at a lower price.
Important points for investors
Look at the rate of return from your investment. Suppose you bought an apartment at a price of Rs 40 lakh and you are getting Rs 20,000 per month on the property through rental income. This is about 0.5% return per month (or about 6% annually). Additionally, if there is establishment of businesses or infrastructure schemes in your area, or any initiatives that increase the value of the area, your returns may proportionately increase.
However, understand that price appreciation depends not only on time but on a lot of other factors. Many times, investors bank on price appreciation due to proposed launch of key infrastructure projects through the area.
Sometimes, these plans may not fructify. Worse, all these points could have already been factored in the property prices, limiting the scope for price appreciation.
Real estate has been an evergreen asset class for investment purposes. Tier-2 towns and the proposed smart cities will drive the next phase of growth. However, investors looking to purchase real estate as part of their investment planning strategy are better off doing so earlier in their careers and later shifting to asset classes with more guaranteed returns as they approach their retirement date. This way, the mortgages would have been paid off when you are still earning handsomely and the rental income would be a handy supplement in your twilight years when your regular income dries up. Also, your property would provide a sense of physical security after retirement.
The writer is CEO, BankBazaar.com