What return can I expect on my second house over 15-20 years?

Published: June 16, 2021 at 10:02 am

Sharad asks, “Have you ever analysed property as a long term investment option? If I have a debt-free second house, should I liquidate it and invest in markets or continue to hold the property for the next 15 years? Assuming all the other things like emergency expenses etc., are taken care of. What is the real xirr that we can expect on a property over 15-20 years? Is there any data that can help in arriving at this?

We have stock market data available from the 1870s. We can analyze it in a zillion ways, but none of it can ever answer “what return can I expect from equity over the next 15-20 years?”. The only honest answer is, “we do not know”. The good news is, we don’t need to know or expect returns! See: Do not expect returns from mutual fund SIPs! Do this instead!

This, of course, does not mean the data or the analysis is all useless. We use the data to understand the cyclic nature of stock market returns no matter how long the investment duration, whether you inevst via SIP or lump sum. Does long-term equity SIP investing work? (106-year analysis) We can use the data to understand how risky the asset class is especially over the long term.

Everyone knows there is no credible data in real estate. There is no uniformity in price and no transparency in the transactions. We only have anecdotal evidence of “big gains” and “slowdowns”. So there is no rigorous way to appreciate the cyclic nature of the asset class and the kind of risks one should expect. Future returned are anyway unknown – hence the past performance disclaimer.

Our love for real estate is natural and instinctive and, therefore, often unreasonable. It is good to see Sharad has a debt-free second house and is dispassionate enough to consider selling to invest in equity.

However, since he has at least a 15-year investment window, I would recommend against selling the second house. Easy to sell, hard to buy! Sharad can use his future cash flow (from employment and rent from the property) to inevst in a balanced asset allocation of equity and fixed income.

An additional source of income retirement (rental income, passive income, dividend income etc.) can make a big difference in making life comfortable after retirement. So you can continue to hold the property for as long as you can. Also, see: Passive income is a crucial part of your retirement plan: How to get started. And, Can I invest in real estate for passive income after retirement?

If there is a shortfall in Sharad’s retirement corpus at any time, he can always sell the second house. It is important not to get too emotional with real estate and treat it as an asset class from which we can derive income or sell (if we must) for capital gains.

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