The process of investing can be as straightforward as saving in a savings account or as complex as trading on the stock market. Depending on the nature of the investment, time and effort are required. Those wanting to invest long-term to retire early can consider commercial real estate investment.
Is it possible to retire early and live a life that is better than or comparable to what they had while they were working? The simplest way to do this is to cease working for a living and ensure that your post-tax passive income (income generated without working for a living) is sufficient to cover your monthly expenses. However, is that enough to cover monthly expenses? In general, it is advisable to cap average monthly expenses to less than 70% of one’s monthly passive income after taxes, so that a sufficient amount can be saved every month. Once that threshold has been met, early retirement can be considered a viable option. Thus, as long as an individual’s passive income allows them to live the life they desire, they can retire.
In recent years, passive income has gained considerable traction. This is in large part due to the variety of online platforms that can be used to augment one’s primary income. A passive income principally consists of three sources: fixed income derived from debt instruments such as bonds and FDs, dividend income derived from stocks, and rental income derived from real estate.
Commercial real estate (CRE) is by far the most lucrative asset class for passive income because it offers high yields of up to 9%, which is greater than most dividend yields, including fixed deposits. Also, technically, income-generating commercial real estate investment is the only investment that can build wealth and earn good passive income at the same time.
Here are two ways to invest in commercial real estate:
REITs: Real estate investment trusts or REITs are like mutual funds that own, operate and manage a portfolio of income generating commercial property. They are an alternate investment asset that allows investors to invest in shares of high quality income generating commercial real estate assets. Investors who purchase listed REIT shares earn in two ways – rental income which is distributed as dividends to shareholders, and an increase in the share value. So if you buy a REIT, you can continue to hold it for as long as you wish, build wealth through appreciation and get regular income while you hold it.
Pre-leased properties: These are commercial properties which are already rented out to a tenant and give an opportunity to an investor to earn stable rental income from the start. Pre-leased properties are one of the most popular options for real estate investors. By investing in a pre-leased property, investors can secure a tenant and guarantee rental income before the property is even bought. This can provide a significant advantage in today’s competitive real estate market.
In addition, pre-leased properties often offer higher returns than traditional investment properties. For these reasons, pre-leased properties are an attractive option for many real estate investors as they enable investors to build wealth through increase in property value and earn strong passive income which increases as the rental increases. Also, CRE is a relatively safe investment as income-producing properties tend to be less volatile than other types of investments, like stocks and bonds. Additionally, it offers several benefits that make it an attractive investment option for those looking to retire early.
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- What you must know
- 1. CRE is a long-term investment.
- 2. Learn to diversify your investments instead of investing in only one asset class.
- 3. The behaviour of markets varies; there cannot be a universal rule.
- 4. Rental returns are determined by both the vacancy rate and market rental rates.
- 5. It is advisable to talk to a financial advisor or investment manager if an asset does not show signs of appreciation within five years.
- 6. It is good to hold on to assets, but it is also good to trade them if conditions are favourable.
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Let’s assume that an investor has an investable capital of ₹5 crores today and plans to retire in the next few years around the age of 40. What is the right way to retire in this scenario? The easiest answer here would be to invest this ₹5 crore in a pre-rented commercial property, which has already been leased out to a trustworthy company for a period of up to 10 years. A rental yield of 7-8% on commercial properties assumes a monthly income of ₹3 to 3.5 lakhs in the bank account without an iota of worry. If the said investor can maintain their total monthly expenses at around ₹1.5 lakhs, they will be able to retire comfortably. What’s more is that the passive income will increase in value as the rental rate rises by 5% every year, or 15% every three years, which is mentioned in standard rental agreements.
In addition, the investment of ₹5 crore is backed by a tangible asset. This property will increase in value, which will increase the value of the investment over time and eventually positively impact the investor’s wealth. By assuming an annual appreciation rate of 5%, this said investor’s wealth will grow by approximately ₹25 lakhs each year.
Furthermore, let us assume that after 10 years, this investor has managed to accumulate enough passive income to sell the property. The property can be sold for almost ₹7.5 crores if it is sold at market value, after almost 10 years of passive income. Thus, making it an overall attractive investment and profitable wealth scenario for the investor. Retiring early can be a very good option if you invest in CRE as it gives you the option to earn passive income along with wealth creation.
What you must know
1. CRE is a long-term investment.
2. Learn to diversify your investments instead of investing in only one asset class.
3. The behaviour of markets varies; there cannot be a universal rule.
4. Rental returns are determined by both the vacancy rate and market rental rates.
5. It is advisable to talk to a financial advisor or investment manager if an asset does not show signs of appreciation within five years.
6. It is good to hold on to assets, but it is also good to trade them if conditions are favourable.
The writer is co-founder, PropReturns.