Gold and real estate are two assets that all of you typically have in your portfolio. And when it comes to evaluating real estate investments, excel sheets, risk and return metrics are not very helpful! This is because real estate investment also satisfies your emotional needs- the positive feeling you experience from owning land or apartment. The question is: How should you make meaningful real estate investment and yet satisfy your emotional needs?

Real estate: Soon-to-be-retirees

Real estate is as an investment only if you buy a house or commercial property to generate rental income or you buy a land for future consumption or for resale. An important variable while making your real estate investment is your age. If you are in the retirement risk zone- within 10 years to retirement- you should consider buying a house to generate rental income during your retired years. Rentals are good supplementary source of income as they offer a decent hedge against inflation; that is, you can increase your rental income in line with the rising price levels in the economy. And how should you fund your investment?

You should buy the house using a mortgage. Why? For one, your income is likely to be stable and perhaps, even peaking as you near your retirement age. For another, you would have consolidated your existing liabilities and, therefore, can afford to take a new loan. Your total liabilities, including the new loan, should not exceed 40 per cent of your total income. The tenure of the loan should be preferably two years less than the time left for your retirement. This will give you enough time to pay off your mortgage and also make additional contribution to your retirement portfolio should there be a shortfall due to decline in stock prices. But about real estate investment for those who are far away from their retirement?

Real estate: Working executives

If you are between 30 and 45 and intend to invest in real estate, you should preferably buy land. Why? Buying a house to generate rental income may not be worthwhile because the building would age by the time you retire. And that could translate into high maintenance costs. Besides, a house does not appreciate much, if it does at all. Land, on the other hand, appreciates because of the demand-supply gap. And why is this important?

You may be uncertain as to where you want to spend your retired life. Now, collecting rental income from your property in a city other than where you retire could create operational issues. You can, on the other hand, sell your land at a higher price at retirement and buy a house to generate rental income in the city in which you retire. But ensure that you buy land in a place where you can either oversee it or have someone do it for you! Otherwise, you could fall prey to land-grabbers.

You should take a loan to buy land, even if the interest rate on the loan is higher than the rate you earn on your fixed deposits. Why? Borrowing forces you to adopt a disciplined approach to managing your monthly cash flows. Using existing fixed deposit to buy land leaves you with higher disposable monthly income, which could prompt you to engage in higher discretionary spending.

Conclusion

Invest in real estate, if you so desire. But do so meaningfully, as real estate can be an important source of income during your retired life. It is important that you do not have real estate as your primary investment, because it is lumpy and illiquid. You should make minimum down payment and buy your real estate investment with loan. This will help you save capital to contribute to your stock-bond portfolio. Besides, inflation typically favours the borrower.

( The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to >knowledge@thehindu.co.in )

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