Despite the presence of a multitude of investment instruments and growing by the day, the real estate sector has not lost its sheen and remains one of the hot favourites of investors. The importance of having a property increases manifold in cases one is nearing retirement. Having a sustainable rental income after retirement acts as a solid source of income for the elderly. Here is how having a rental property will help you after your retirement.
A Solid Asset
Irrespective of the type of property, having real estate in one’s investment portfolio itself is a mark of intelligent investing. If it is a land tract, its value will appreciate with time and by the time you retire, you will have a high valued asset. Even after many years of rental income generation, it can be sold at a highly appreciated price. Although the selling prices will depend upon many factors such as the location, development of the area, type of land, and connectivity etc. Even if it is not generating rental income, it can be a solid asset during a rainy day.
A sustained rental income is easily comparable with a pension. If the tenants are good and the rent/lease arrangements are watertight, the property will generate sustained rental income for the owner. Whether it is a plot or a commercial property or a shop on rent, the sustained income flow is of high importance post-retirement.
However, the investor must carefully draft the rent agreement or lease agreement so that fraudulent or unscrupulous tenants or encroachers do not pose challenges during the tenancy. Getting a certified police verification and background check will go a long way in this regard.
Investing in a Real Estate Fund
Although a relatively newer concept, the Real Estate Investment Trusts (REITs) and similar real estate funds are offering an attractive opportunity for property investors. Instead of investing directly in large properties, the REITs are traded on the share market and returns are distributed to the investors. If you make such an investment in your prime earning days, they will turn into valuable assets by the time you retire.
In addition to being a sustained income source, the returns or rental income from the property will be inflation-adjusted. As the rental agreement would make it clear that an annual increase of 10 percent will be applied, the returns will comfortably beat the inflation.
Even if you are paying the EMIs for the property, the rental income will cover the EMIs and the balance would compound if invested further.
Increase in Net worth and Declining Debt
As the rental income will cover the home loan or mortgage, the debt will come down periodically. This will increase your net worth. Once the debt is entirely paid by the rental income, you will get a free and clear rental asset, which would be a workhorse post-retirement. On the one side, you will have an income source till you die, and you will also leave a solid asset for your offspring as an inheritance.
Unlike other investment instruments such as mutual funds and equity, where the returns are unpredictable and market controlled, the return in real estate is very predictable. Going by the historical returns pattern, you can easily guess or calculate the estimated value of the property after 20 years. You know the value of a purchase. To calculate future returns, you can use various free tools available online.
Conclusively, if real estate investment is done after proper research and location are appropriate, the property investment might turn into a sustained source of rental income for the retirees.
Authored by Suren Goyal, Partner, RPS Group