A few years ago I read a book called Rich Dad Poor Dad. The book inspired me to think differently from what I was always told.
The most middle-class thing I have heard people say, including my family, is that loans are bad. Bank loans are not a bad thing especially if you come from a middle-class background and want to buy your own house.
Sure, if you have the money to make a down payment you should never ever think of a loan but if you are someone who has a steady monthly income but no lump sum amount to make an investment, I believe bank loans and especially home loans are a good way to create real estate assets that can serve as your lifelong passive sources of income.
The attractiveness and reliability of real estate as an asset class are time-tested and proven. I know some very smart people who swear by real estate investments.
For those who are just starting out and do not have financial muscle or backup and want to create real estate assets, this post will analyze how you can use a bank loan to create an asset early on in your life.
Using bank loan to buy residential real estate
For example, If you are buying an apartment worth 50 Lakhs today. You will have to arrange a minimum of 10 lakhs (as a down payment) and the rest 40 lakhs you can get financed via a bank loan.
Assuming a home loan rate of 6.7% for a loan of 40 lakhs and a tenure of 15 years the EMI comes out to be 35,286 rupees.
In my experience, you can expect a rent of approximately 20,000 to 23,000 for such a property in Zirakpur.
The difference is approximately 11 to 13 thousand rupees per month.
Add to it the maintenance cost of approximately 2500 rupees per month which makes the total about 15,000 rupees per month which has to come out of your own pocket.
If you don’t want to pay anything from your pocket monthly then you will have to increase the down payment to approximately 50% of the total down payment i.e 25 lakh rupees.
In that case, the rent you can generate from the property will pay for the EMI and there will be no monthly outgo from your pocket.
In such a case you can save up and get the property free by pre-closing your loan whenever you have the money saved up to pay up the pending loan amount. (target a period of five years)
Using bank loan to buy commercial real estate
Commercial real estate is a completely different ball game altogether and the salaried class rarely invests in the commercial segment. This is so because a commercial investment suits when the payment is made full, in advance. ( we will discuss this later in the blog.)
However, I have argued before that commercial real estate can make you wealthy faster than residential real estate and you don’t even need to own the property. (buyback options are great)
There are many attractive options in the Tricity that allow you to invest and receive monthly returns.
The investment options start from as low as 20 lakhs and go up to multiples crores.
Let us discuss a case where a person is again investing 50 lakhs in a commercial property.
It is easier to get better returns on a commercial property in the Tricity.
If you want to invest 50 lakh rupees in the commercial segment you can get attractive schemes such as buybacks, monthly returns, and lease guarantees.
For example, if you are investing 50 lakh rupees you can expect a return of 6 lakh rupees per month i.e. 50,000 rupees per month (1 % per month) from the next month onwards.
The possession for such commercial projects is years away (usually 3 to 4) and one can make good money on an under-construction property which is not the case in residential investment.
The next question arises whether the commercial property will be rented out or not and at what rate on completion.
For that market, a comparison needs to be done. Bigger builders have a dedicated leasing team that helps the property owners to lease out their properties.
The builders also provide a 3+3+3 (total 9 years lease guarantee) to the buyers if they so choose.
In a usual scenario banks offer loan for commercial properties at the following rates:
8.4% for cibil >=700
8.75% for cibil 600 <700
Loan amount up to 15 cr
Max term is 15 yrs
For commercial property, you should be aiming for as low a loan as possible because that would mean that you get to keep the money you are getting from the builder but at the very least you should be ready to pay at least 30% from your own pocket.
So if you are targeting an investment of 50 Lakh rupees you have to pay 15 lakh rupees from your own pocket and 35 lakh rupees of bank loan but that will make your EMI approximately 62,000 rupees per month (@8.75% for 15 years ).
In case you want to make the monthly EMI and the returns equal so that you don’t have to pay out of your own pocket, you would have to invest 22 lacs out of your own pocket and will have to take a loan of around 28 lacs.
In this case, your monthly EMI for the loan will be covered by the cheques you would get as returns against your investment.
Please note that you will get returns only on the amount you invest. It could vary from builder to builder but mostly this is the norm. Thus it is always advisable to buy a commercial property on maximum down payment.
I believe very strongly that real estate can create strong passive income streams and with smart application of finances one can make real assets with ease.
If you have an interest in real estate passive incomes and investing do get in touch, I have some great residential and commercial investment options to pitch to you in Zirakpur and Mohali.