As I have talked about previously too, investing in real estate can be the source of passive income along with an investment which is almost guarenteed to have capital appreciation. However, as a wise investor you must think years ahead of schedule and into your retirement and whether concentrating your hard earned capital into one single asset class in lieu of sustained income makes sense.
Let’s take a deeper dive and figure out whether you should rely on rental property income for your old age.
Return on Interest
As an investor this must be the first thing that comes to your mind, well it should. The housing market currently is going through one of the poorest investment yield in India. That statement sounds really paradoxical, given the growing population of India and decreased property ownership rates, shouldn’t rental yields be higher?
Well the reason rental yield is so deplorable in India primarily boils down to norms and regulations. Rental norms favour the tenants over landlords which in combination with the often high interest rates makes it unaffordable for many. This raises the opportunity cost and comparatively low rentals.
However, the figures are different when it comes to commercial real estate leveling at about 6%-8% annually. But that is a significantly larger investment and definitely out of scope for the average investor. This forms the bulk of the reason behind real estate being in such a deplorable position when it comes to investing, however this was a general reason. Let’s look at some very specific scenarios for a broader understanding.
High Capital At Stake & Liquidity
Gone are the days when real estate would be the safest asset class to invest in, given the absurd increment in real estate prices and the failure of the average investor to secure a credit hefty enough to invest in such a big-ticket investment.
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Diversification however is something that investors across the spectrum swear by. Given how easy it is to get into stock investment nowadays, it should not come as a surprise that investment in real estate has seen a continued dip. In the same time period however, a sustained growth in stock market indices were observed-
This takes me to my next point, liquidity. While thinking about your retirement one of the most crucial points to take note of is health complications as is common in old age. God forbid, but you might incurr a medical emergency which requires you to shell out a significant fortune. Selling your investment in form of real estate is not only time consuming, it is incredibly risky and can cost you a lot as well!
On the corollary however, mutual funds and other stock market options can be sold with the click of a button at almost no extra cost and certainly without carrying significant risk because if you are investing with a long term mindset it is incredibly unlikely that you’d not have enjoyed a good 11%-16% Y-o-Y return by then.
Maintaining Real Estate Is Laborious
Yes! It might get passed off a passive income stream but for most private investors given how little the margins already are, it is not possible to hire a manager. Therefore, repairs, shortlisting tenants, fixing damages, collecting rent, pay for insurance and taxes, and a host of other expenses both physical and monetary.
After retirement, would you have the prudence to carry out such operations by your own self?
And this is not even considering the potential months of non-rental stagnation as this very pandemic has proven. The bank will charge you the loan repayment even if you don’t have a tenant in your property. Is that a risk you have the financial position to take?
Bottom Line
In the end, yes real estate investing has its strong suit. It is an excellent leverage instrument but in my understanding it is best carried out on an institutional level because of the economy of scale attached with it. If at all you are set on investing in real estate, instruments such as REITs (Real Estate Investment Trust) where you purchase fractional owner of properties can be a worthwhile area to direct your research at.