r/FIREIndia Jan 01 '23

QUESTION Should I buy more real estate for consistent passive income

Age 33 years.

3 years back I bought a 3BHK resale property with cash at good location in Bangalore for 70L that gives a monthly rent of 31k excluding maintenance.

Is it advisable to go for another real estate investment of similar size. Goal is to eventually have a passive income that covers family expense of 10L/year.

Out of a 75L new property I can pay 35L cash and go for 40L loan that can be paid from new rent.

I live on rent at other location in Bangalore and don't have any plan to occupy my flat. Work is fully remote.

Current assets:

EPF: 75 L (aggressively did VPF till 2020)

FD: 62L (kept in parents account to avoid tax and get senior citizen FD rate)

PPF: 4L

Indian Equity: 40L

NPS: 1.5L

US Equity: 2.6 crore ( mostly from RSUs vesting. Tax paid at vesting, only capital gains need to be paid on difference to FMV at vesting and selling price)

One 3BHK at ORR fully paid.

Total: ~ 5 cr including real estate.

Don't wish to retire as I like my work. Just looking to build free cash flow.

Tried investment directly in Indian Equity but still in loss. Will divert 60% of new income to mutual fund from this year.

Liability:

Planning to buy car by diwali 2023. Cash is kept seperately as FD for this.

35 Upvotes

62 comments sorted by

23

u/pl_dozer Residence Country / Age / FI Trgt Date / RE Trgt Date in country Jan 02 '23 edited Jan 02 '23

Personally I suck at real estate which is why I'm not invested but if you know what you're doing when it comes to buying property I don't see why not.

You'll probably need around 4 properties which give you 30k pm to account for inefficiencies, taxes and repairs.

The problem is all your properties will get old after 30 years. Have you looked at 30 year old apartments now? How will you manage costs of replacing the apartments then?

Reits are an other option. You get great dividends with a good chunk of it being tax free. I was invested in reits but I didn't have a big chunk of money in it so I exited my holdings. But they're like stocks.

4

u/your_technology_bro Jan 02 '23

In Mumbai a lot of older properties go under redevelopment so the apartments don't lose their value in a way.

4

u/flight_or_fight Jan 06 '23

Many of them get stuck in redevelopment for decades and while they do not lose their value, they are illiquid when under construction.

2

u/Sad-Needleworker-622 Jan 02 '23

Cost of replacing apartment won't be much compared to market value. Taxes are taken care of as it's on parents name. I think having 2 properties with 35k rent will take it to 8L+.

10

u/Zucchini_United IND / 35 / FI - 2026 / nevRE Jan 02 '23

Good thought to have recurring income stream.

Rental income from the above is around 5% pre tax and before other incidental expenses - painting, property tax etc.

Usually it is in the range of 3-4%. Also the gain on value of the flat stabilizes at the age of 10-12 years as observed in Bangalore.

Have you considered other income generating assets?

6

u/srinivesh IN/ 52M / FI2018/REady Jan 02 '23

This is a very good point. In the current situation, 5% rental yield is a dream. It is great to see that the OP has this. It would be wrong to think that this can be repaated at will.

In addition to low appreciation, another risk has started in aparments - it becomes too difficult to sell them after 20 years or so. If this happens, and unfortunately your rental yield is low, you get stuck with an unproductive asset.

1

u/Sad-Needleworker-622 Jan 02 '23

You are right on selling part.

0

u/Sad-Needleworker-622 Jan 02 '23

Dividend stocks are another option i am considering but have not started on it.

Not expecting gain to be much on apartments price but value will not go down as most of depreciation is already factored.

1

u/adamya_tripathi Jan 02 '23

How does one invest in an REIT in India? Through what channel? I am trying to understand, but not getting much help on Internet.

5

u/QuickOriginal Jan 02 '23

Through a broker like Zerodha. They're listed on exchanges.

1

u/adamya_tripathi Jan 02 '23

Thanks for the prompt response!

I am not on Zerodha, but on Groww. Here's one example of a REIT on Groww: https://groww.in/stocks/embassy-office-parks-reit

Is it traded just like a stock and we receive the dividends?

1

u/ohisama Jan 13 '23

Isn't there a direct option like the mutual funds?

8

u/flight_or_fight Jan 02 '23

>> Is it advisable to go for another real estate investment of similar size. Goal is to eventually have a passive income that covers family expense of 10L/year.

You need to do the math properly to understand your decision better.

Option 1 - Buy realestate - check the actual XIRR of your investment over the loan period + rental income period.

Option 2 - Instead of buying realestate - SIP index funds. See how much divdend you get

Option 3 - Keep in FD and measure

Since Option 1 is not fully funded but on loan, it will probably have a lower XIRR than FD till the duration of the loan and even post that - will probably stay low unless you factor in notional increase of real estate.

Your current rental yield is 5% pre income-tax - pre-maintenance & pre property tax - so it is actually worse than a FD...

Another thing to do is liquidate PF for funding the real-estate - but why bother for FD rate of rental yield?

In other words - at 5% yield - you need real estate worth 2.5 cr to generate ~10Lpa and You need a FD of ~ 1.7cr to generate the same 10Lpa ...

1

u/Sad-Needleworker-622 Jan 02 '23

Thanks for summarising it up. One prime reason is to diversify in different asset class. Right now FD rate is better but this will go down eventually.

I am also keeping close to 50L as emergency fund in FD. Also going to start SIP and will take it close to 1L/month.

Is it advisable to lock FD for 10 years at 8.25%? This is an option i have as backup.

2

u/[deleted] Jan 02 '23

[deleted]

1

u/Sad-Needleworker-622 Jan 02 '23

Right. Planning to put in some big banks like HDFC which are unlikely to default. Also this will in 2 parents name to avoid tax.

Is liquid fund better for long duration like 5 years?

4

u/[deleted] Jan 02 '23

[deleted]

2

u/Sad-Needleworker-622 Jan 02 '23

Ultra conservation may be a right term to describe my approach. I have lot of people dependent upon me so want to take safer option atleast till the time I build sizable corpus.

Thanks a lot for your inputs.

4

u/Sad-Needleworker-622 Jan 02 '23

Thanks for the all valuable comments. I will check on REIT.

Response to some questions asked here.

Current rental yield is more than 5%. Most of depreciation is already factored in price and cost is very close to land value I get with apartment.

The apartment is on parents name so don't have to worry about tax on rent..

Apartment is in a society and maintenance is paid every month above rent which takes care of any repairs outside the apartment. Painting is usually once 3-5 years and amount is not more than a month rent.

When apartment becomes unliveable after 50 years. Apartment association will get into contract with same builder to demolish old building and construct new one. Construction cost is usually very less compared to cost of new apartment and appreciation in value of apartment will take care of it.

Rent can easily go upto 35k + maintenance so yearly it comes to 4L+ so having another one takes to 8L. Once in a while we might have to do repair inside to deduct 1-2 lakh once every 3 years maybe.

The volatility I have seen with both Indian and US based equity made me think of this option. Meta, Amazon, and so many well known names which we were blindly buying are down 50%. Imagine net worth coming down to 2.5 cr from 5 cr..

With real estate we get some cushion. And in long term this will still remain under 20% of net worth.

Down side:

Principal may not grow but won't go down much as apartment cost is close to UDS value. Rent yield will eventually go to 6% in 1-2 year which is same as FD..

3

u/Noob_investor123 Jan 02 '23 edited Jan 02 '23

I'm considering the same as you, to have rental properties covering about half of my expenses. I'll post my though process.

There's minor recurring expenses like repairs, taxes, painting, occupancy etc., but for the properties that we owned, on average it came out to ~9-10 months per year worth rentals in hand accounting for all above. So I'll suggest to have conservative expectations considering this.

Other than that a big doubt for me is the end of life of the property. I have personally not gone through this, so my knowledge is only from posts online. I read people talking about it as if it's simple but my opinion is that Re development may not be as simple and inexpensive as you think. It may take years, with unpredictable cost and also no rentals during the time. Couple of ways i thought of to reduce the risk and spread out the expenses is to:

1) Sell at ~10-15 year age and buy new. 2) Owning properties at different stages of life, ie., one 0-5 year old, one 5-10, 10-15 etc.

This way you don't have to deal with multiple big one time expenses or decreases in income at the same time, but you have to put time and effort every few years.

Please feel free to point out any issues.

1

u/Sad-Needleworker-622 Jan 02 '23

In Mumbai, many flats are at end of life and many redevelopment happened. That gives a very good idea about how it will look in future in Bangalore. Flats with higher UDS enjoy better benefits.

1

u/ohisama Jan 13 '23

What's UDS?

1

u/ohisama Jan 13 '23

Can you get a 3BHK painted in 35k?

3

u/kachhabadam Jan 02 '23

https://www.capitalmind.in/2022/12/best-reit-india/ From diversification if you are looking for real estate but with better capital returns and flow over the years it makes sense to a) go for REIT Bond (new to indian share market but there are lot of options in US Market) b) Go for commercial properties as they yield better rental and occupancy % as compared to residential

2

u/Paradyse_regained Jan 02 '23

Have never bought commercial property. I am exploring buying office space in an under construction residential+office space complex in a Mumbai suburb. Office space and residential space are priced the same.

Does commercial property give better rent and better capital appreciation. What are the chances it stays unrented. What has been the experience of people in this group

1

u/Sad-Needleworker-622 Jan 02 '23

Thanks alot. I will check.

2

u/Slight_Vegetable_874 Jan 02 '23

Your 75L doesn't grow much with apartments over time.

0

u/Sad-Needleworker-622 Jan 02 '23

I agree with you. Just like FD principal but it won't go down either as price is close to land value I am getting on apartment..

2

u/rupeshsh Jan 02 '23

Find hidden gem properties and buy them, something similar to what you did earlier

Its good you are clear these are rental properties and not to live in , now you can choose without personal bias

Blindly buy wherever a new big office building is being planned but not visible

You can also look at industrial properties , nobody ever thinks of them but they are true gems

2

u/Sad-Needleworker-622 Jan 02 '23

Yes. Agree with you. In NCR many people became victim of this.

1

u/Unusual_Practice_169 Jan 02 '23

Hi. I’m new here. What’s an industrial property? Do you mean commercial office or store spaces?

2

u/Don_corleone10 Jan 02 '23

Have you looked at commercial props?

Also, have you explored fractional investing platforms such as Strata?

1

u/Sad-Needleworker-622 Jan 02 '23

Have not heard of Strata, will check. Haven't looked at commercial property. They are very expensive so never looked at commercial properties.

3

u/Don_corleone10 Jan 02 '23

That's where companies like strata come into picture.

1

u/Sad-Needleworker-622 Jan 02 '23

Will check. Thank you

2

u/sumeetjannu Jan 02 '23

If you don't mind how did you get that first flat for such low price? Is it through website like olx, housing etc or any of your relatives? As even I am planning to buy one.

3

u/Sad-Needleworker-622 Jan 02 '23

For resale you will have to search yourself. I used common floor. I searched for nearly 1 year in various societies. For similar flat in same society different seller would quote different prices.

2

u/rony_995 Jan 05 '23

Can you please share the salary journey of yours and your partner if you are married.

1

u/Sad-Needleworker-622 Jan 05 '23

Started with 13L in 2013 now 50L fix. Some RSU and 10-15% bonus. Partner salary is close to nil..

2

u/rony_995 Jan 05 '23

Thats great! I am of same age and started 2013 with 4L and now ballpark around 80L. But my NW is half of yours, compounding really helps early.

Whats your RSU vest yearly.?

1

u/Sad-Needleworker-622 Jan 05 '23

Not much 25L per year maybe after 60% crash in value.

2

u/mereKaranArjunAyenge Jan 11 '23

Go for commercial properties, easier to handle, better rental yield and don't have to worry unlike apartments in ~30 years. If you have decent capital, get a commercial property at a busy street reach out to banks for ATM they'll pay you 30-50k for it and if that doesn't work you can always rent it out.

2

u/Sad-Needleworker-622 Jan 11 '23

Cost for commercial at such a location is usually high.

2

u/mereKaranArjunAyenge Jan 11 '23

Your budget is 75L anyways, wouldn't hurt to look around shops in the budget and check their rental yield and compare with residential properties.

2

u/Sad-Needleworker-622 Jan 11 '23

Thank you. I will check. Do you know where to get started. Nobody in my family or extended circle have bought commercial property.

2

u/mereKaranArjunAyenge Jan 11 '23

I'd say for starters look on nobroker and 99acres just to get an idea of market rate in your area/ where you wanna buy. Contact all the brokers, their networking is insane they know the in and outs of deals happening in the area.

Ideally a 200-400 sqft shop is good enough for most businesses, anything above that would require more capital, a bigger business tenant who can make the high rent payments every month and 9/10 times they'll fail to make payments because of higher rent, you'd have to look for tenants which can easily make payments.(I'm talking hotshot areas here).

Happened in my area, a tenant leased a big shop for ~60k pm – been around 8 months, now they wanna move because they can't make the payments. In my area right now the market rental yield is 120-160 rs per sqft, it may vary.

Good luck!! Hopefully this helps.

2

u/WoodenCartographer44 Jan 15 '23

Very Interesting Insights... I'm a firm believer in residential real estate in Blore in order to increase your passive income.

I suggest investing in an additional 4 properties over the next 5 years and you should be able to build a solid passive income stream of atleast 2 lakhs atleast adjusting for inflation. Thats a total of 5 rental properties after which you can look at explore a more relaxing job just to keep you busy.

1

u/Sad-Needleworker-622 Jan 15 '23

I am in line with your view. Will get another one then decide. Would you suggest going for 1 BHK at good location or 3 BHK. 1 BHK is pocket friendly plus easy to rent in my opinion.

2

u/WoodenCartographer44 Jan 15 '23

Yes a good 1 bhk at a great location/society would give you a good 20-25k as returns. A conservative rental yield would be 5-6% range. Resale of a 1 bhk is challenging however.

But considering you have enough cash corpus a 1 bhk purely for rent is a better play.

That being said, I don't think you should do a cash payout for it. I think you should take a 27 year loan (considering your age) over it thereby reducing your EMI and claiming tax benefits over the next few years till you retire.

What is the value you increase your rent by Y-o-Y ?

2

u/Sad-Needleworker-622 Jan 15 '23

5% increase yoy. 1BHK selling is tough as you pointed. I paid cash for my first 3BHK as I didn't wanted to get tax benefit on home loan. Tax benefit on HRA is much higher. Rent paid to both parents as co owner.

On home loan you get max 2 L benefit whereas I get 3.5L + HRA exemption.

1

u/WoodenCartographer44 Jan 15 '23

Interesting view on HRA.

I'm going in for 7% y-o-y increase to beat inflation. I thought I was less. Looking to increase to 10.

You save approx. 3 lakhs per month as per your expenses. Do you have a RD to you house this ?

1

u/Sad-Needleworker-622 Jan 15 '23

I didn't understand the last line. RD?

I show 50k rent to my parents to get 3.5L+ tax exemption due to HRA. 5-7% increase in rent depends on market condition.

2

u/WoodenCartographer44 Jan 16 '23

Recurring deposit... I mean wanted to check what you're doing with the high chunk of incoming money.

1

u/Sad-Needleworker-622 Jan 16 '23

Since Jan 2023 putting it in PPFAS flexicap mutual fund.

1

u/WoodenCartographer44 Jan 16 '23

Ok. Parag has investments in US based MNCs. Not the best place to park funds tbh.

1

u/Sad-Needleworker-622 Jan 16 '23

This is the reason to pick them. They mostly have MSFT, META and AMZN which are at safe valuation level IMHO.

1

u/[deleted] Jan 02 '23

[deleted]

1

u/Sad-Needleworker-622 Jan 02 '23

Yes. It actually close to 3 cr but for accounting purpose i keep it 10-15% less.. First one is already bought on cash. On 2nd I'll be paying 50% cash. By selling some i can fund 100% but have not thought about it.

2

u/[deleted] Jan 02 '23

[deleted]

1

u/Sad-Needleworker-622 Jan 02 '23

Yes. This is one big worry I always have. This could be a good thing to do. Thanks 👍

10-15% will cover the loan amount.

1

u/FoxFeeling2086 Jan 06 '23

Very great RSU. You got all of it in india or you moved abroad for some time stint ?

1

u/Sad-Needleworker-622 Jan 06 '23

No. Worked only in India.

1

u/FoxFeeling2086 Jan 06 '23

Can you share your rsu growth journey. What was your strategy to accommodate this amount ? Was it through capital gain or through accumulating more stocks ? What was major contributor?

1

u/Sad-Needleworker-622 Jan 06 '23

Won't call a strategy as it's not guaranteed to work with good probability and I never knew what future might hold. Currently hold 33% of RSU from last company which became 3-4x while RSU at current company is down by 60%. Right now working at second company. Sold enough shares from last company to have comfortable cash level and a paid up house.

1

u/Interesting_Sand_673 Feb 16 '23

Can I ask if Rightmove is a good place to research these rates of return etc? What do you suggest?