Vipin Bhatt, 48-year-old corporate employee, in Noida is planning to take early retirement as soon as his retirement corpus grows to ₹one crore. This is likely to happen in another couple of years. He is now contemplating investing a sizeable portion of this corpus in a fixed asset such as a property. His logic is simple.
“My money will be secure unlike in a financial asset, and I will be able to earn a steady rental income from it, which will take care of my post-retirement expenses – at least partially,” he says.
He is not alone. There are hundreds of thousands of conservative investors who are not willing to trust the financial markets for their lifelong savings. Among other things, the ongoing volatility is to be blamed for their apprehension.
There is no denying the fact that there are a numerous benefits of investing in a real estate. Some invest in it for long-term appreciation in its value, while there are others who want to earn rental income.
Conservative investors tend to stay invested in a fixed asset to be able to earn rental income that can help them sail through their post-retirement life.
The recently-witnessed growth in residential market also supports this phenomenon. According to a CBRE report, number of residential units sold in 2021 was around 2 lakh, a jump of over 70 percent y-o-y. And out of the total sales, mid-end segment and budget category comprised an overwhelming 78 percent.
The report further says that a positive momentum in new launches and sales to continue in 2022 while affordable and mid-end segments will continue to drive sales.
A Cushman & Wakefield report also states there were 2,045 launches in March quarter 2022, an increase of 7 percent year-on-year. A JLL report states the Q4 numbers of residential market surpassed the pre-COVID era, comfortably.
Let’s explore some of the key advantages of investing in real estate by retirees:
Investors who are seeking financial independence and retire early (FIRE) can invest in real estate out of their retirement fund to earn rental income which — by and large — can take care of some of the post-retirement expenses.
“One of the major advantages of investing in a house is that you can earn a handsome income in form of rent while it appreciates in value at the same time,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
However, retirees should be mindful of the fact that the rental yields depend on the location and condition of the property. The more strategic the location, the higher would be the rent.
Another thing that retirees should keep in mind is that they should buy the property as close to their main residence as possible, and preferably closer to where their family stays. It is convenient to find tenants and to coordinate with them if it is located closer to your residence. Else, travel expenses and commissions that are paid to property agents could eat into your rental income.
What are the cons?
There a flip side to investing in real estate for the purpose of generating rental income. First, it is very expensive, especially in the big cities such as Delhi or Mumbai where a two-bed room house can easily cost around ₹50 lakh 90 lakh.
Also, if you happen to leave the city or your country, you may find it difficult to manage the property, particularly when your family, too, stays far.
However, it is quite important to realise that one may want to retire early but not everyone can achieve it. Before retiring early, one can aim for early financial independence wherein rental income can play a part.