Posted on: 2016-06-20T09:34:04
People buy land or a home not just for their own use but as an investment quite often. In these cases, property is not a consumption purchase and must be seen as a part of a portfolio of assets. When building a portfolio, real estate as an asset class can be a very helpful tool that plays a pivotal role in meeting certain financial goals. Globally, property is an accepted asset class used by financial advisors to meet investment goals of their clients.
Here are three examples of how property investments can be thought of in your portfolio to help you reach certain financial needs.
Young parents start to worry about their children’s education early on. The struggle and high fee to get admission to a pre-school makes them wonder about college expenses, given high inflation in education costs. For those with funds available now, buying a property and holding it till the child is ready for college can be one choice to consider for parents.
Land can be a good option to consider as it enables investing a smaller sum as well as a much large sum. You can also buy in smaller quantum and add to the overall portfolio over a few years, as and when you have funds. A home is also an option and rental income can be invested in a systematic investment plan to continue building the corpus towards meeting the education expenses in the future.
Given that property markets go through cycles and selling a property may take time, you can consider selling the property a years ahead of when the funds will be needed. Invest the money in liquid investments such as fixed deposits so that you are assured of having it handy for college admissions.
Property can be a good asset that can provide monthly income during your retirement. This is in spite of rental yields being quite low, only about 2-3 per cent of the property value.
For example, during your working years, you may be in a high tax bracket. You can take a loan for a home that is worth say Rs 30 lakh and avail tax benefits. A second home has no restriction on the amount of interest you can deduct and the expenses you incur on the home can be set off against the tax on rental income.
Say the house price appreciates over the years by say a nominal 5 per cent. In 8 years, you may have repaid the loan (average loan tenure tends to be 8 years) and the house is worth about Rs 45 lakh. At 2 % rental yield on Rs 45 lakh, you earn Rs 7,500 per month. This can cover 10-20% of your monthly expenses which may be in the range of Rs 40,000 to Rs 75,000.
Rents also typically keep pace with inflation. If inflation is 7 % rents would increase to Rs 10,000 in about 4 years and your expenses may be Rs 50,000 to Rs 1 lakh. Rents continue to contribute 10-20% of your monthly expenses. This can be quite helpful especially if other sources of your income – fixed annuities, fixed deposit interests or fixed pension – do not keep pace with inflation.
Asset for business
Property assets can also come in handy if you intend to take some loans in the future. For instance, say you want to start a business a few years down. You can buy a home and pay off the loan while you are earning a salary. When you start a business, this will ensure that you need not have to budget cash flows for your rent. Running a business creates severe cash flow issues as there is no steady income and avoiding one big need for monthly cash can be a great source of relief.
Also, a home is an asset against which you can take loans for your business. It is good collateral, against which many banks and financial institutions lend. The rate of interest on a loan against property, about 12% currently, is also much lower than other personal loans that may be charged over 14%. Unlike gold loan, where the collateral is physically in the possession of the banks you can continue to live in a pledged home and save on rent.