Once you retire, you’ll need to have a robust income generation strategy in place. While there are several ways to generate a steady income from your lump sums investments, all of them have their relative merits and drawbacks. Here’s a comparison between rent and reverse mortgages – the two ways in which you can convert your real estate into an income generating asset.
For many of us, the phrase ‘investment income’ is synonymous with ‘rental income’. This, in my opinion, isn’t a great idea at all. Gross Rental yields are extremely low in most metropolitan cities; In Delhi, they typically range from 2.75% to 3.50%. In Mumbai, they are even lower, at closer to 2.40%. They used to be close to 7% in Bangalore until a few years back; they are down to roughly 4% now.
What this essentially means is that you can typically expect a rental income of Rs. 20,000 to Rs. 30,000 per month on a property that you bought for Rs. 1 Crore; factor in taxation (rental income is taxed as normal income), maintenance costs and the time that your property spends vacant between tenants, and you’ll likely end up at a real rental yield of closer to 2% per annum – a pittance!
A deeper, structural concern is that such low rental yields are often symbolic of overvaluation – so you may just be dealt a double whammy in terms of low rent, plus zero to low appreciation for an extended period of time.
Real Estate is also indivisible and relatively illiquid, so the only way to realize interim liquidity from it (for instance, in case of emergencies) is to take a LAP (Loan Against Property). Needless to say, this will involve an interest burden.
A Reverse Mortgage is a variation of a Loan Against Property, wherein a homeowner aged 60 or more can avail a loan against a self-owned property. The difference between an RM and a LAP is that instead of the borrower paying back EMI’s (as in the case of a LAP), the lender pays the loan amount to the borrower in tranches (capped at Rs. 50,000 per month).
At the end of the tenor, the loan is settled by the legal heirs by liquidating the property or by paying off the loan amount. There are no repayments to be made by the borrower during his or her lifetime.
RM’s have been wildly unpopular in India; primarily because in our country, a residential property is considered nothing short of a sacred asset that is usually held to be bequeathed to future generations. If that’s not a constraint for you, it may be a useful option to consider. Make sure you opt for the RMLeA (Reverse Mortgage Loan enabled Annuity) option instead; this would yield a higher amount for you, and also safeguard you against the risk of outliving your savings.
Having said that, a RM is not inflation linked, and therefore isn’t a complete solution. Needless to say, what’s worth 50,000 per month today will be worth a lot less in ten years’ time.