Real estate for a retirement portfolio: Should you or should you not?

Real estate investments require large amounts of capital and therefore it is advisable to start investing early, when one is rather free of family responsibilities.

By Abhinav Sharma, AVP- Finance of Realistic Realtors

Millennials are perceived as people living today without any worry about the future. This, however, is hardly true. Millennials do live in the present; but they also plan for the future at the same time. Most of them are already making some kind of investment for their retirement. The stock market, mutual funds, and pension schemes are some of the ways by which people are investing to secure their future after retirement.

However, due to the volatility and complexity of the stock markets, many investors either don’t want to invest in it or look for avenues to diversify their investments. Investment in real estate, by conventional and new methods, has emerged as a viable option for an investment portfolio with retirement in mind.

Traditionally, the first real estate investment for most people is buying a house to live in. After owning a house, investing in a property with rental income in focus is the next big thing. The residential property takes precedence for majority even in the case of investing for rental income.

However, a small percentage of investors also invest in commercial properties for the same purpose. Real estate investments require large amounts of capital and therefore it is advisable to start investing early, when one is rather free of family responsibilities. The target should be to have the property loan free 5 to 10 years prior to retirement.

One careful analysis must be done for the expected rental income and the costs like maintenance, property tax, etc., must be taken into consideration. It goes without saying that the investment is viable only if the expected income is significantly higher than the expenses. An investor investing directly in a property should be aware that real estate is rather difficult to liquidate on short notice.

While investing in real estate with retirement in mind, the investors should remain flexible regarding the location. Investing in upcoming locations could offer competitive rates and schemes from the developers. However, things like connectivity, developments in the vicinity, the reputation of the builder, and government plans for the location are some of the important points that need to be considered before investing one’s hard-earned money.

When one talks about investing in real estate, investing directly in property is the first thought. However, investing directly in property is not the only option available to the investors. Real estate investment trusts (REIT) are a tool for investing in real estate without buying a property. REITs are companies that invest in real estate, own and operate them. The investors receive dividends from the profits made by the company. Considering the global experience, historically REITs are one of the best-performing assets.

REITs can help investors diversify their portfolios. They minimise the risks and offer higher returns. REITs typically focus on specific sub-sectors of the real estate sector. Five types of REITs are generally available for investors; Retail REIT, Residential REIT, Hospitality REIT, Mortgage REIT, and Office REIT. As per the market conditions and own preference, the investor may choose any of the above-mentioned tools. An experienced real estate advisor can help in opting for the best REITs available in the market.

Besides, lower risks and higher returns, REITs also offer flexibility in terms of the lock-in period. The investors can liquidate their assets on short notice. However, since we are discussing the retirement portfolio, it is advisable to stick to the investments for a longer duration. Before jumping on to REITs, the investors should be aware that the dividends from REITs are taxed as normal income.

Real estate investments have conventionally given investors a sense of security by owning something real and tangible. However, it is rapidly emerging as an option to diversify investments, create new income streams, and secure the future.

However, like any other investment, real estate is also not completely risk-free, although the risk factor is significantly lower than most other options. To make the most of the real estate boom, the investors need to carefully select the investment tool and be ready to stick to their investments for long.