Rentals Or Mutual Funds: What Is The Best Wealth Strategy For Residential Property Owners?

Parijat Roy, 45, a private sector employee, lives in Kolkata, with his wife and his 70-year-old mother. Apart from the house they live in, they own four more apartments in the same city. While they like living in a house with a bigger space, they have rented out the four other apartments, which give them a steady income for themselves and their family. Now, as Roy is ageing, he is faced with a dilemma: would it be wiser to persist with rental earnings, or they should consolidate their properties by selling them off one after the other and investing the process in mutual funds? “I need to talk to some experts and find out whether selling them off would yield higher returns, even after factoring in the capital gains tax. Moreover, I need the income that I get from my properties every month,” he said.

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According to financial advisors, in the current Indian real estate market, the rental yield, which is the ratio of the property’s annual rent to its total cost, generally ranges from three to five per cent for apartments across most metropolitan cities. It can vary from city to city and location. After tax and maintenance, the yield could be less. Commercial property may yield higher than five per cent which varies from city to city. Rental income is taxable at an individual tax rate. “Based on the lifestyle if your expenses are say Rs 50k per month. You are living in your own property and you have another property value of Rs 1 cr. As per the rent in that city, for example, Kolkata which has rental income ranging from three to five per cent to four per cent yearly, the rental would be Rs 33.33k as per four per cent and annually it will be Rs 4 lakh, deducting maintenance and tax, and yield will further reduce. Also, gross return on property ranges from a compound annual growth rate (CAGR) of seven to nine per cent. Factors like inflation, capital gain tax, and other expenses will reduce the return,” Hina Shah, CFP® financial coach and mutual fund distributor said.

According to Shah, the average return of hybrid mutual funds in India over the last 25 years has changed, with some funds offering returns ranging from seven to 18 per cent since inception. These are aggressive hybrid mutual funds. “The Systematic Withdrawal Plan (SWP) enables individuals to withdraw funds from their investment at regular intervals. For instance, if one withdraws six per cent, it allows them to cover their lifestyle expenses while maintaining a minimum growth rate of at least seven per cent on the remaining corpus,” explained Shah.

For example, if you invest Rs 1 crore, then withdrawal can be six per cent, which means you can receive Rs 6 lakh a year, which means Rs 50k monthly withdrawal and you will be taxed at short-term or long-term bases on the period of holding, and the rest of the fund corpus grows at seven to 12 per cent.

According to experts, real estate is a cyclical asset class. At present, due to a mismatch in demand and supply and in the recent past with an influx of residential properties coming up, there is higher supply and lower demand Certain areas have seen price corrections while others have undergone time corrections. “Despite these adjustments, the total expected income from real estate, combining a four per cent appreciation and a two per cent rental yield, sums up to six per cent,” Hrishikesh Palve, director, Anand Rathi Wealth Limited said.

“Alternatively, investing in the market could yield a return of 11 per cent (based on the median three-year rolling returns from 2001 until now), with mutual funds potentially adding an alpha of two to three per cent which sums up to a return of 14 per cent. This makes market investments a far superior option compared to real estate. Therefore, it is advisable to consolidate and sell real estate that is not needed for personal use or as a strategic investment, and to diversify into a balanced portfolio of mutual funds,” Palve added.