Retirees: are you physical or financial?

Discover the factors driving retirees to transition from rental income to financial assets for easier management and higher returns.

Most retirees prefer rental income. But there comes a time when retirees may have to decide whether to continue earning rental income or sell the property and deposit the money in a bank. This week, we discuss the factors driving such phase transition.

Real estate is an important part of most retiree’s investment portfolio. The reason is simple. You receive a steady cash flow every month that substitutes for the active income you earned during your working life. Importantly, you can annually raise the rent to help manage the increase in your monthly household expenses.

Also read: Portability in passion assets

The flip side is real estate, being a physical asset, requires continual attention. The cost of repairs will surge exponentially if you do not maintain the property. Then, there is vacancy risk. What if you cannot find a suitable tenant? There comes a time in every retiree’s life where they feel financial assets are easy to manage. We call this the phase transition. This is when retirees who hitherto preferred physical assets are now ready to embrace financial assets.

As a retiree, when should you embrace such a phase transition? One, when you are finding it difficult to get tenants. Two, the maintenance cost of property is increasing. Three, your property is ageing. This is a crucial factor if you own an apartment, where the undivided share of land is small; older the property, lower the rental yield and sale consideration. And four, you are unable to manage physical assets because of your health condition. Converting physical asset into financial asset is not easy. In addition to finding a suitable buyer, you must mull all the associated costs related to the sale, including taxes.

Sometimes, the best time for a phase transition is when there is surge in demand for real estate as the property can be sold for a good price. In other words, you can mull phase transition even if you do not face any of the issues stated above. Physical assets have charm because of touch-and-feel factor but are difficult to manage as we age. That said, you may not have to consider phase transition if your adult child is willing to actively manage the property. But remember, if you have more than one child: It is easy for legal heirs to divide financial than your physical asset after your lifetime.

(The author offers training programmes for individuals to manage their personal investments).