When I am old and grey, I still want to be able to get monthly income that will afford me the simple luxuries in life—- air-conditioning, good food, movies, travel and outings with my family. I also want to be able to cover my own maintenance medicines and hospital bills so that I do not burden my children with these financial needs.
By that time, my body will not be as strong and healthy as it is now. I may not have the stamina for full-time work. My knees might not even get me to the third floor. That is why, I have been studying and preparing for my retirement with my husband.
Together, we’ve invested in insurance, forex, mutual funds and real estate. Out of all these, I expect real estate to give us the most steady cashflow for each month. Real Estate is also something that I can pass on to my children when my time here on earth is up. That is why I am now focused on real estate investing.
But let’s hold our horses first and examine if Real Estate is really a viable Retirement Strategy. What are the possible hiccups that we might encounter along the way? If Real Estate is such an awesome investment, why are people not rushing to buy as much properties as they can get their hands on?
Real Estate is a Capital Intensive Long Term Investment
Real Estate requires capital. The more prime your location, the higher the capital requirement and income potential. It will take years to be able to afford one if you are employed with an average salary level. At the start, rental properties with mortgage payments will provide you very little cashflow, sometimes, you might even be operating at a loss. But if you invest early, even with a mortgage, the rewards can be very good by the time you retire. For example, a family friend of ours invested in a 3 bedroom unit in Ortigas Center. He bought his rental property in year 2000 for Php3,000,000 under a mortgage. He didn’t earn that much initially from the rent but he did manage to pay-off his mortgage with the rentals he earned. 18 years later, he receives rental income of Php65,000 per month for that property. His property value has quadrupled. Cost is minimal since everything is paid by the tenant except for the RPT and Insurance. So if you want quick returns, maintaining rental property isn’t your answer. But as a retirement plan, it may prove a good investment for the long-term.
Real Estate is Not a Liquid Investment
Unlike forex or stocks, Real Estate is not liquid. If you need cash fast, you cannot just sell it quickly. The process of doing due diligence, paperwork and transfers will take time. Rental properties, however, can give you liquid cash monthly. Later on, when you pass it on to your children, they can derive monthly income from it too if they do not sell it. But passing your estate to your heirs when after death requires money too. Currently, the new TRAIN Law has pegged estate taxes at 6%. It is prudent to allot extra funds to cover that to ensure your children will not have to scramble to find cash to pay for estate taxes later on. With rental properties, you can enjoy a good cashflow upon retirement and pass on the income generating asset to your children after.
Real Estate is Not Really a Passive Form of Income
Contrary to what many investment and real estate gurus say, Real Estate is not a purely passive income. In fact, it is a business and should be treated as such. You need to find tenants, keep track of income and expenses, do collections or even evictions at times, as well as pay taxes, business permit renewals if you properly register and become compliant to the law. Even if you hire a property manager, there are still work to be done and taxes to file. When you are old and grey, you need some assistance to manage this. I experienced renting from a very kind 78-year old landlord. Two years into the property, she stopped cashing in our checks for about 8 months despite our reminders. We wondered why this is so. We later found out from her son that she had dementia. Luckily we never touched or used the amount in the bank that we allotted for the rent so when the son requested, we paid in full immediately. The neighbor however, did not pay properly and they now have to go through the long, tedious and costly eviction process. So it is important to treat this not just an investment but also as a business and ensure that administrative matters are handled despite old age.
There are definitely challenges that you will face if you choose real estate as a retirement strategy. But I think getting a stable monthly income through rental properties during retirement, if done properly, can give you a good comfortable life. There is still a bit of work to be done to maintain it, but it will not take too much time, energy and effort compared to full-time employment or entrepreneurship.
What about you? What is your retirement strategy? Is rental income part of your nest egg?
Jhoanna Gan So is the co-founder and President of Businessmaker Academy and HR Club Philippines. She is a Property Investor and Licensed Real Estate Broker (REB PRC # 0029553). She devotes most of her time to business education, real estate and her amazing family.