By now, the safety of investments and its importance was pretty much ingrained in the thought process of AK and Rajesh. The previous discussions on investments, particularly the ones on safe investments and gold had an eye-opening impact on them. However, as Pranav had been observing, AK was struggling with his own dilemmas due to convictions built up over time, right or wrong.
The slew of real estate investments by AK over the years had made him very biased towards this asset class. Moreover, his personal historic experience, even though dated and largely perceptional, made him question Pranav’s wisdom on real estate investments time and again. He discussed it repeatedly within his family, but the social echo-chamber of family members and others biased in favour of real estate kept him hooked on this avenue as an investment.
Still, surrendering to the displayed financial wisdom of Pranav, for once, he decided to have a heart-to-heart discussion on it in the morning coffee session after the round of Golf. After all, real estate had only been discussed in passing till now in recent discussions.
When he brought it up the next morning, Rajesh was quick to respond. “You are still stuck on that? Hey, C’mon AK!”
Pranav was less surprised. Every time he had mentioned real estate in the past, even if just as a passing reference, he had observed a spark in AK’s eyes. The questioning gaze was evident, as AK had put almost all of his life’s savings in real estate.
Pranav calmly agreed, “I will be happy to discuss all things threadbare. But you will have to promise to me that you will listen to it with an open mind even if you do not agree with it,” he told AK.
AK was already determined to face his personal demons on the subject of personal finance, and hence, readily agreed to this. “Let us start with your basic premise about low returns that you spoke about the other day,” he said.
“No. We will first start with what kind of life do you expect to lead when you are fully retired. I would say that it should be a financially comfortable life where you can go and visit places with your family and friends, attend course mates’ bash-ups, play Golf to your heart’s content, dine in good places etc. For all this, you need ready money availability. If you have money locked in long term assets, you are violating this basic definition of a Golden Retirement”, Pranav said with clarity.
“Yes, no doubts about this. I want to have a good life after retirement. What use is money lying locked up somewhere in real estate if it is going to appreciate many years later? I take my life time to be, say, 85 years. Taking out last 10 years of that as inactive years of life with very less requirements, I want to kick up life in the retired years till about 75 years of age. I don’t want any real estate to block my dreams,” replied Rajesh very conclusively.
AK opined, “But Rajesh, I have got very good returns from my real estate investments and I can sell them whenever I want. In fact, real estate prices rising more and more will only make me richer and richer and help me live life like a king.”
Sensing AK’s discomfort, Pranav came in, “I know what you are thinking, AK. There certainly could be exceptions. The best way to determine the true value of your real estate is by listing your property for sale, and observing the offers that you receive. In my experience based on similar discussions with others, this, unfortunately, results in bursting the mental-bubble for many real-estate owners,” he said.
Pranav continued, “There are basically three myths associated with real estate.
Firstly, that it will always increase in value. While that was true for quite some time in the past, the bubble burst around 2013. There is such a huge over-supply of constructed and under-construction residential, commercial and office space all over the country now, that it will take a long time before the current meagre demand can absorb it.
Secondly, that rentals are a good way to earn income. Residential rentals give 1.5-2.5% returns on the current capital value while commercial may, at best, go up to about 6% taxable. The large capital employed to get a property and their illiquidity does not justify such small returns, which even a safe bank FD with instant liquidity can also match.
Lastly, that the tax saving on home loans means one should buy a house to save tax. Even if you are in the highest tax bracket, you save, at the most, 30% of the interest as tax saving. Rest 70% interest has to be paid for. Hence, one is paying an interest of additional 70% to save 30%!”
AK was surprised with this revelation by Pranav. “Do you mean to save that I should just have one house to stay and nothing else?”, He was incredulous.
“Why do you need more than one house at this stage when you are retiring, have almost fulfilled all your responsibilities and just want to lead a great life. If you need money for any situation, where will you keep running to sell your properties? If you have the same money in liquid assets like bank FDs, mutual funds, or even gold for that matter, at least it can be sold quickly, that too at transparently known market rates,” This time it was Rajesh who butted in.
AK seemed to be in deep thought. “This has been very helpful, Pranav, especially the fact about tax saved being far less than net interest outgo. Never thought about it like that. I will certainly try the experiment of listing some of my properties for sale to get a clearer picture,” he positively said, thanking Pranav with a smile.
- We only need one house to stay in our retired years. The hassles associated with managing more properties coupled with their low returns makes them a poor investment choice in retired years.
- Returns from real estate are quite poor compared to other safer options.
- The tax saved through home loan is always much lower than the net interest outgo. If it is not your first house, this might not be a wise choice to save taxes.
- Liquidity is all that matters after retirement and determines what kind of a lifestyle will you have in your retired years. Do not let real estate block your dreams