Why Your Second Flat is a Bad Retirement Plan: Rental Yield (2%) vs. SWP (8%)
Author: WealthTacticsHQ Research Team | Read Time: 18 Minutes | Category: Retirement Planning
Introduction: The "Rent will Pay for Retirement" Myth
Ask any Indian uncle for retirement advice, and the answer is almost always the same: "Buy a second flat. Putting it on rent will give you a steady pension for life."
In India, Real Estate is not just an asset; it is an emotion. We believe bricks and mortar are "safe," while the stock market is "gambling."
But emotions make for poor financial advisors.
If you actually sit down with a calculator (which we did), the numbers tell a shocking story. In Indian metros, Residential Rental Yields are historically low (1.5% to 3%), while inflation is high (6%).
If you park your ₹1 Crore retirement corpus in a flat, you are signing up for a retirement of low income, high taxes, and constant tenant headaches.
In this showdown, we compare the traditional Rental Income Strategy against the modern SWP (Systematic Withdrawal Plan) strategy. The winner isn't even close.
Part 1: The Scenario (The ₹1 Crore Duel)
Meet two retirees, Landlord Lalit and Smart Suresh. Both retire at 60 with a corpus of ₹1 Crore. They need a monthly income to survive.
1. Landlord Lalit (The Real Estate Fan)
Lalit buys a 2BHK apartment in a good suburb of Mumbai/Bangalore/Delhi for ₹1 Crore.
Strategy: Rent it out and live off the monthly rent.
Assumption: "Property prices will go up, and I'll get monthly cash."
2. Smart Suresh (The Mutual Fund Investor)
Suresh invests his ₹1 Crore in a Conservative Hybrid Mutual Fund (mix of Debt and Equity).
Strategy: Set up an SWP (Systematic Withdrawal Plan) to withdraw a fixed amount monthly.
Assumption: "I want steady cash flow with tax efficiency."
Part 2: The Cash Flow Reality Check
Let's calculate the Year 1 Income for both.
Landlord Lalit’s Income (The 2.5% Yield Trap)
In major Indian cities, average rental yield is ~2.5% to 3%. Let's be generous and assume 3%.
Gross Annual Rent: 3% of ₹1 Cr = ₹3,00,000.
Gross Monthly Rent: ₹25,000.
But wait, the expenses:
Society Maintenance: ₹3,000/month (Tenant pays rent, Owner pays maintenance usually).
Property Tax: ~₹10,000/year.
Repairs/Painting: ~₹20,000/year (1 month rent equivalent).
Vacancy: 1 month every 2 years (Asset sits empty).
Net Monthly Income: ~₹18,000 - ₹20,000.
Lalit blocked ₹1 Crore to earn less than a starting salary.
Smart Suresh’s Income (The 8% SWP Engine)
Suresh sets up an SWP at a conservative 8% withdrawal rate (Hybrid funds average 9-10% returns long term).
Annual Withdrawal: 8% of ₹1 Cr = ₹8,00,000.
Monthly Income: ₹66,666.
The Result:
Suresh earns 3x more monthly income than Lalit from the exact same capital.
Part 3: The Tax Blow (Rent is Expensive)
It gets worse for Lalit when the Income Tax department knocks.
Feature | Rental Income | SWP (Mutual Fund) |
|---|---|---|
Tax Treatment | Added to Total Income (Slab Rate) | Capital Gains (Principal is tax-free) |
Deduction | 30% Standard Deduction | Only Profit portion is taxed |
Taxable Amount (on ₹66k) | ~₹46,000 is taxable | ~₹5,000 is taxable (in Year 1) |
Tax Payable (30% Slab) | High | Negligible |
Why SWP Wins on Tax:
When Suresh withdraws ₹66k, the government sees it as: "₹60k is his own principal coming back (No Tax), and ₹6k is profit."
Lalit’s rent is treated purely as income. He pays slab-rate tax on it.
Part 4: The "Capital Appreciation" Argument
Lalit shouts: "But my flat value will double in 10 years! Your mutual fund will vanish!"
Let's look at the data.
Real Estate Growth: In the last 10 years (2014-2024), residential property in metros has appreciated by 3% to 5% CAGR (barely beating inflation).
Hybrid Fund Growth: Conservative Hybrid Funds have delivered 9% to 11% CAGR.
The Liquidity Nightmare:
When Lalit is 75 and needs ₹20 Lakhs for a heart surgery, he cannot sell "one bedroom." He has to distress-sell the whole flat, pay huge capital gains tax, and wait months for a buyer.
Suresh presses a button on his app, and ₹20 Lakhs hits his bank in 3 days. The rest of his money keeps growing.
Part 5: Comparison Summary
Metric | Second Flat (Rent) | SWP (Mutual Fund) | Winner |
|---|---|---|---|
Monthly Income | Low (~2-3% Yield) | High (~6-8% Yield) | SWP 🏆 |
Tax Efficiency | Poor (Slab Rate) | Excellent (Capital Gains) | SWP 🏆 |
Liquidity | Very Low (Months to sell) | High (T+2 Days) | SWP 🏆 |
Maintenance | High (Tenants, Repairs) | Zero (Automated) | SWP 🏆 |
Capital Growth | Moderate (3-5%) | Good (9-11%) | SWP 🏆 |
Part 6: Expert Verdict (The Role of Real Estate)
Does this mean Real Estate is useless? No.
Primary Residence: Buying a home to live in is a great emotional and financial security anchor.
Commercial Real Estate: Shops/Offices can give 6-8% yield, comparable to SWP, but require higher capital (₹3 Cr+).
But a Second Residential Flat for retirement income is mathematically the worst asset you can own in India today. It turns you into an unpaid property manager for your tenant.
Conclusion: Be an Investor, Not a Landlord
Retirement should be about freedom, not chasing tenants for rent or fixing leaky taps.
The Strategy Shift:
Sell the extra flat (if it's yielding < 3%).
Invest the lump sum in a diversified Hybrid Mutual Fund.
Start an SWP.
You will instantly triple your monthly cash flow and lower your tax bill. That is what financial freedom looks like.
How much pension can you generate?
Don't guess. Input your corpus into our SWP Calculator and see your potential monthly salary.
🟢 Key Takeaways
Yields are Low: Residential rent only gives 2-3% returns, while SWP can safely provide 6-8%.
Liquidity Risk: You cannot sell a "part" of a house for emergencies. Mutual funds offer instant partial withdrawals.
Tax Efficiency: SWP is extremely tax-efficient compared to Rental Income which is taxed at your slab rate.
Peace of Mind: SWP is automated. Renting requires active management.
Disclaimer: This article is for educational purposes only. Real estate markets vary by location. Please consult a SEBI-registered investment advisor before selling assets.