Retirement options – a huge home or a large retirement corpus

BENGALURU: Having a real-estate heavy investment portfolio is a common investment fallacy. For many, it is their life’s savings. They concentrate so much on building this one single asset that they forget to save enough for other important goals, retirement for one. They will build a second house but not put enough savings in a pension plan. While their net worth will be in crores, the retirement stash may be insufficient.

Apart from downgrading their lifestyle or working longer, downsizing the house is one of the few strategies available to near-retirees who find themselves short on retirement savings and little to catch up. Moving to a small house, especially if children have moved out, and adding the extra equity to their retirement corpus may make a sense to may. However, it is easier said than done. Here are a few issues to consider and calculations to do before you make this decision.

Cost of selling
Your house might be old and need a facelift, which won’t come cheap. New paint and refurbishing the kitchen a little may actually add to the valuation. However, it would be foolish to go overboard as home improvements don’t pay beyond a point. The idea should be to make it look clean and livable for your buyer without having to spend too much on repairs. Small things like all switchboards working, a manicured terrace or garden, new tiles in bathroom and kitchen can add up to 15-20% to the value of the home. You can also consider shifting if it is outdated. However, if you add a bathtub or spend on a fancy home lighting system won’t fetch any additional returns. So, do the cost versus value addition math as your primary agenda is liquidating an asset and transferring it to another corpus.

It doesn’t end with home improvements. If you are lucky, you may be able to find a buyer yourself. However, majority of people still sell through agents. Once the sale deeds are signed, you’ll also have to pay commissions to real estate agents, usually to the tune of 1-2% of the home‘s value.

Even if you plan to not invest in new furniture, you have to pay the movers-and-packers fee, which could be quite high if you move to another city. Do not forget to add these little costs and then evaluate how much you stand to gain from the transaction. And if that gain is worth the trouble and time spent.

Selling also means buying another house
House hunting is a tedious task and finding a good place can take months — sometimes even a year. Are you up for the job? Also, you may have to be flexible in terms of where you want to live. Since you are looking for a cheaper accommodation, you may have to move to the outskirts or to even a smaller town. Will you be okay retiring away from your existing social circle–family, friends and lifestyle? You can consider not buying another property and living on a rented accommodation. It is easier and more predictable but leaves you vulnerable to annual rent increases.

If you have made up your mind to sell, you should zero in on a house first before posting that sale ad for the existing property. The Income-Tax Act exempts the capital gains from the sale of a house if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years from the date of sale. However, since you will not be investing the full proceeds from sale of previous property to purchase the new house, there will still be some capital gains on which you will have to pay a 20% tax after indexation (assuming the property is being sold three years from possession). To save your corpus from the tax-axe, you can invest capital gain bonds.

Although they do not give a very high rate of return, just 6%, and have a lock-in of three-years, long-term capital gains invested in these bonds is fully tax exempt. However, there is a restriction as the annual investment limit for this instrument is Rs 50 lakh. “If the gains are in excess of Rs 50 lakh, the taxpayer can choose to spread the investment between two financial years to make up to Rs 1 crore tax-free. However, the second investment has to be made before the return filing date, that is, July 31,” says Archit Gupta, CEO, ClearTax.in.

Alternative ideas
If you live in a private house — not an apartment — and finding a new house sounds like too much trouble, try making a deal with a local builder. It is a common trend these days where a small builder redevelops the property into a multi-storeyed apartment block in exchange for selling rights of one or two floors. As an owner, you are saved from finding a new home as you can choose to live on any one of the floors and sell the rest.

The builder can also help you sell these floors for a commission. Rather than selling some also rent out the floors, which too is a good source of inflation-adjusted monthly income in your retirement. If you do not want to redevelop but have some extra room in your big house, you can still consider renting. In fact, if your children live with you, they can pay you a rent and avail HRA benefits on the same. Then there is always an option to reverse mortgage the property.

But this is only useful for apartments or properties with valuation of around Rs 1 crore, as that is the maximum mortgage amount offered by banks. The best part about reverse mortgage is that since amount received through reverse mortgage is a loan and not income, it will be tax-free.

The maximum loan amount would be up to 90-60% of the value of the residential property, depending on the location of the property (up to Rs 1 lakh) for a term of up to 20 years or till the death of the property owner. You could either opt for fixed or floating. The rates would be determined by the prevailing market interest rates. The fixed rate is usually 2.5% more than the current base rate.

You can opt for a monthly, quarterly, annual or lump sum loan payment. You should avoid going for a lump sum as there is a property revaluation once every 5 years. If at such time, the valuation of the property has increased, you will have the option of increasing the quantum of the loan and be given the incremental amount in lump-sum. The biggest drawback of this route is that the lender will own the property at the end of the tenure. So, you would not be able leave the house as inheritance. The bank would, however, give your heir the first preference to buy back the property at the end of the tenure.

Credits Economic Times

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