Role of Real Estate in Retirement Planning

I often told my team mates in the BFSI sector, that their biggest competitor for selling investment plans is not another company or product, but another asset class- Real Estate.

Indians tend to think the family is secure if they have built a house to stay, and at least one other residential or commercial property to earn a rent from.

WHY DOES REAL ESTATE OCCUPY A HIGH MINDSHARE?

  • It is visible like gold jewellery, and enables people to flaunt their wealth.
  • It is REAL, not a fluctuating number like value of stocks. 
  • India has not seen a severe drop in property prices. The high appreciation in prices of prime properties makes it look like a very attractive option.
  • It is an asset to be passed on to future generations.

WHAT ARE THE PITFALLS OF REAL ESTATE?

It is not liquid. When you need money, the market conditions may not be conducive to selling or renting options. It will fetch money, but not always the expected returns.

Maintaining numerous or large properties is cumbersome. 

If you do not have successors, you don’t get to enjoy your wealth and it falls into random hands later.

HOW CAN ONE LEVERAGE ON REAL ESTATE?

Loan against property

Loans against property are available from banks and non-banking financial companies, to the extent of 70% of the estimated property value. Loan to value ratio differs in different locations and for different kind of properties.

The rate of interest is in the range of 13% -19%

You need to have 

  • Clear title deeds in your name
  • No encumbrances or charge of another entity
  • Income proof
  • KYC documents

Repayment schedules are decided in line with your income, other liabilities and risk factor involved.

Collateral for business and education loans

Your eligibility for a business loan, or an education loan for your ward or self improves if you can mortgage property as collateral.

Boosting your retirement fund

You may not need a large house in a prime location in late years.

Children have settled abroad in many cases, and have no interest in the house.

It makes sense to sell a large house, and move to an affordable home. The balance amount can be invested to yield a monthly income, or as a hedge against inflation.

Related post: Working Real Estate Investing into your Retirement Strategy

Reverse Mortgage

If you are a senior citizen, you mortgage the property to the bank, and they pay you a monthly annuity for 10-15 years.

The annuity stops after 10-15 years, but you or your surviving spouse can stay in the house for a lifetime.

After that, the bank takes over the property.

Surviving heirs can choose to repay the loan amount and take the property if they wish so. They can also avail of a home loan to finance this.

The product has not matured in India, and the terms and conditions appear stringent. The returns do not look too attractive. The bank may revise the annuity amount in case of a depression in real estate prices.

The Indian mindset is inclined heavily towards leaving a legacy, and they do not want to hand over property to the bank.

However, this is an efficient way of boosting your income to manage inflation in late years. You reap the benefits of your investment in your life time.

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