Can you fund your retirement through rental income?
Can you fund your retirement through rental income?
Rental Income is quite a favourite as a retirement planning tool and used by many. People generally buy a second property primarily for investment and rental income purpose. In fact rental properties offer the rare opportunity to generate extra cash in post-work life.
However one needs an inflation adjusted income to see themselves through retirement
To earn a good rental yield, a property should not only have been bought at a reasonable price, but should also have specific advantages. Central location, access to facilities like markets, school and hospital, modern amenities in the community, and good-quality construction and maintenance are all important in ensuring a good rental income.
Concentrating only on rental property, however leads to limited flexibility to access one’s resources according to needs. If there are no other assets, it might make sense to invest the money in more flexible assets. People should realise that diversifying assets is a better idea to manage their need for retirement income rather than blocking it all in property, whose appreciation they may not enjoy in their lifetime.
Thus rental income should be a part of the overall retirement corpus diversification.
Rental Income as a retirement planning tool is quite beneficial .
- It helps create a good enough amount to live a peaceful and luxurious life.
- It is quite stable and sustainable. A drop in rental value is a very rare scenario. Rental income gives regular and inflation-protected cash flow with negligible risk of the principal asset depreciating.
- One can save tax on rental income in a variety of ways like excluding maintenance charges from rent received, municipal taxes deduction, standard deduction at 30 % of the taxable value etc.
- The Rental Property can act as the Back-up Plan.In worst case scenario, one has the option to reverse-mortgage their property if the retirement corpus falls inadequate in the sunset years. Unlike a traditional loan, under a reverse mortgage loan, one can borrow money against the value of his or her home.
- If someone is living in a rented accommodation, it would be a double wammy for them to pay rent, and EMI and still not own a home.
- The best part is it can be left an asset for legal heirs.
While buying a property investment for rental purpose the following two points should be taken into consideration
The advantages of rental income are
- It helps create a good enough amount to live a peaceful and luxurious life.
- It is quite stable and sustainable. A drop in rental value is a very rare scenario. Rental income gives regular and inflation-protected cash flow with negligible risk of the principal asset depreciating.
- One can save tax on rental income in a variety of ways like excluding maintenance charges from rent received, municipal taxes deduction, standard deduction at 30 % of the taxable value etc.
- The Rental Property can act as the Back-up Plan.In worst case scenario, one has the option to reverse-mortgage their property if the retirement corpus falls inadequate in the sunset years. Unlike a traditional loan, under a reverse mortgage loan, one can borrow money against the value of his or her home.
- If someone is living in a rented accommodation, it would be a double wammy for them to pay rent, and EMI and still not own a home.
- The best part is it can be left an asset for legal heirs.
While buying a property investment for rental purpose the following two points should be taken into consideration
- One must have a strong reason to invest in property through Home Loan. It is a good decision if the same is bought from own sources or funded from a bulk amount from an investment, inheritance etc.
- It is advisable not to buy under construction property for investment as it blocks the capital for a long time and does not yield income and if taken through loan would incur an additional burden on one’s cash flows.
Relying on Rental Income for post- Retirement expenses – what are the pitfalls?
- Expenses and upkeep:
Rental properties, however, also come with risks. For starters, they are quite expensive.
Rental expenses may include the following :
- advertising for renters
- cleaning and maintenance
- commissions or management fees
- insurance premiums
- local transportation expenses to oversee the property
- depreciation of rental property
- legal expenses concerning rental property
- travel expenses
- real estate taxes
- repairs
- supplies
- tax return preparation for rental properties
- Risk of empty units :
The landlord may not find renters when he/she urgently needs them if the existing tenant vacates the home all of a sudden.
- Illiquid Asset :
Real estate in general is also an illiquid asset.
If a person is forced to suddenly sell the property , he/she may find himself/herself in the midst of a down market and may be unable to unload the home for a reasonable price — if at all required. One may end up selling up the property at a much lesser value. However this will again reduce the retirement income or the rental income of the person (more so if the property been sold is the only source of rental income).In this case the person should make alternate sources of arrangement for other retirement income.
However one can pay a property management company to handle all this work , but this will increase one’s regular expenditure.
Tax implications and benefits of relying on Rental Income for Retirement living expenses
Rental income from property in India is considered as income accrued in India and taxable irrespective of residential status. One need to pay tax on this rental income. The gross rent received by the owner is not fully taxable. While calculating the taxable value of rental income, various deductions are available.
Interest paid on a loan taken for construction, repairs, acquisition, or renewal of the property: Pre-construction period interest deduction (available as deduction in five instalments from year subsequent to construction completion year).
Additionally, any repayment of principal amount against housing loan taken for such property is also eligible for deduction under section 80C (maximum deduction under this section is Rs.1.5 lakhs)
Is Relying Solely on Rental Properties a Good Strategy?
There is no proper answer to this. Which is why it is important to create multiple types of portfolios, with rental income as one source of retirement income
Investment in financial assets have proved to work better and provide more clarity, transparency, disclosure and returns for funding retirement needs.
However it is always a better idea to stop and think every once in a while, reassess the financial goals, and look at other means that will drive one where he/she needs to be.
We hope we have answered your queries on why planning for retirement at an early stage is beneficial for you. If you still have any unanswered questions or need help, feel free to contact us here.
We would be glad to help you with your planning and investment related decisions.
Debalina Roy Chowdhury
Para Planner- Dilzer Consultants
Sources
http://www.nitinbhatia.in/personal-finance/rental-income-save-tax/
http://www.bankrate.com/finance/retirement/funding-retirement-with-rental-income-1.aspx
http://articles.economictimes.indiatimes.com/2014-12-04/news/56723491_1_tax-benefit-rental-income-2-lakh