61 year old with rental income and FD seeks advice on selling pre-leased office

Ans: At 61, your financial position is secure. You earn Rs 1.32 lakhs per month from residential rentals and Rs 1.20 lakhs per month from Fixed Deposits (FDs). Additionally, your commercial property generates Rs 39,000 monthly. This brings your total monthly income to Rs 2.91 lakhs, which is quite substantial for a comfortable lifestyle.

Assessing the Commercial Property Sale
You're contemplating selling your commercial office, which provides a monthly rental of Rs 39,000, for an expected Rs 1 crore. If you invest this Rs 1 crore in an FD, you expect to earn Rs 60,000 per month. While this increases your monthly income by Rs 21,000, there are several key factors to consider before making this decision.

Factors to Consider Before Selling
1. Rental Yield vs. FD Returns
Your commercial property currently provides a rental yield of approximately 4.68% annually (Rs 39,000 * 12 / Rs 1 crore). This yield is modest compared to the expected FD return of around 7.2% annually (Rs 60,000 * 12 / Rs 1 crore). While FDs offer a higher immediate return, it’s important to understand the limitations of relying solely on FDs for your income.

2. Capital Appreciation Potential
One significant drawback of converting your property into an FD is that your capital will not appreciate over time. Real estate, while sometimes unpredictable, has the potential for capital appreciation. By selling and investing in an FD, you may miss out on future value growth of the property.

3. Liquidity and Flexibility
Selling the property would convert a non-liquid asset into a highly liquid one. This liquidity is beneficial, especially in emergencies. However, this comes at the cost of losing potential long-term appreciation. FDs are also a low-risk investment but provide no capital growth.

4. Maintenance and Management
Real estate requires ongoing maintenance and management. While your commercial property is pre-leased, which reduces management efforts, it still involves some degree of involvement. In contrast, FDs are entirely passive, requiring no maintenance, and offering predictable income.

5. Tax Implications
When selling the property, you must consider capital gains tax. The profit from the sale of the commercial office will be subject to capital gains tax, which can impact your net returns. However, you can explore reinvesting the capital gains in specific bonds under Section 54EC of the Income Tax Act to save tax. Consulting with a tax expert is advisable to understand the implications fully.

6. Market Conditions
Real estate markets can be unpredictable, and timing your sale is crucial. If the market is stable or declining, selling now might be wise. However, if the market is expected to appreciate, holding onto the property might yield better returns in the future.

Exploring Alternative Investment Options
1. Balanced Portfolio Approach
Instead of reinvesting the entire sale proceeds into FDs, consider a more diversified investment approach. A balanced portfolio of equity and debt mutual funds can offer both capital appreciation and a stable income. This approach helps to hedge against inflation and provides growth potential, unlike FDs which are limited to fixed returns.

2. Equity Mutual Funds for Growth
Equity mutual funds offer the potential for higher returns through capital appreciation. While they carry more risk than FDs, the long-term growth prospects can significantly enhance your overall wealth. By allocating a portion of the Rs 1 crore into equity mutual funds, you can aim for a balanced growth strategy that aligns with your financial goals.

3. Debt Mutual Funds for Stability
Debt mutual funds provide a stable income and are less volatile compared to equity funds. By investing a portion of the sale proceeds into debt mutual funds, you can secure a predictable income stream while maintaining a lower risk profile. This diversification between equity and debt will ensure that you have both stability and growth in your portfolio.

4. Systematic Withdrawal Plans (SWPs)
You can also consider setting up a Systematic Withdrawal Plan (SWP) with your mutual fund investments. SWPs allow you to withdraw a fixed amount regularly from your mutual fund investments, providing a steady income similar to FDs but with the added benefit of potential capital appreciation.

Risk Management and Diversification
1. Reducing Over-Reliance on FDs
While FDs are secure, over-reliance on them can expose you to interest rate fluctuations and inflation risk. Diversifying your investments into a mix of equity and debt mutual funds can mitigate these risks and provide a balanced income and growth strategy.

2. Maintaining a Balanced Portfolio
By diversifying your investments across different asset classes, you reduce the overall risk to your portfolio. A combination of equity, debt, and possibly a small portion in FDs can provide a stable income while ensuring that your capital continues to grow.

Long-Term Financial Security
1. Inflation Protection
Over time, inflation can erode the purchasing power of your fixed income. While real estate can offer some protection against inflation, equity mutual funds are often better suited to outpace inflation and grow your wealth. Balancing your portfolio with equities can help protect your financial future against inflationary pressures.

2. Healthcare and Emergency Funds
As you age, healthcare expenses are likely to increase. Liquidating your property and reinvesting in a diversified portfolio of mutual funds ensures that you have accessible funds for any unexpected medical or personal emergencies. It also allows you to maintain a buffer that can grow over time, supporting any future needs.

Emotional and Personal Considerations
1. Emotional Attachment to Property
Selling a property that you have owned for years can be an emotional decision. It’s important to weigh this against your financial goals and long-term plans. If the property holds sentimental value, consider whether selling aligns with your personal values and objectives.

2. Legacy Planning
If you have children or dependents, think about how the sale of the property might affect their inheritance. Some people prefer to leave tangible assets like property to their heirs, while others might opt for liquid assets that are easier to manage and distribute. Discussing your plans with your family can ensure that your decisions align with their expectations.

Final Insights
Converting your commercial property into an FD would provide a higher monthly income but no capital growth. Instead, consider selling the property and reinvesting the proceeds into a diversified portfolio of equity and debt mutual funds. This approach offers both income stability and the potential for capital appreciation, which can enhance your financial security and support your long-term goals.

This diversified investment strategy aligns with your retirement needs, offering growth, income, and flexibility. Consulting a Certified Financial Planner can help tailor this approach to your specific situation and ensure that your portfolio is well-balanced to meet your future requirements.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in