I am 33 with in hand monthly income 1.25L with 10 years experience, thinking to proceed with a under construction flat worth 1.2Cr. I have 20L in savings (excl. EPF, PPF, NPS) to pay for initial payment for remaining 1CR is it advisable to go for a loan (I have no other EMIs)? Banks are ready to give 1CR with around 75K EMI after full disbursement.

Ans: Muzammil! You’ve got a lot on your plate, and I appreciate you reaching out. Managing finances and making significant investment decisions can be challenging. Let’s break this down and see what’s best for you.

Understanding Your Current Financial Situation

You live in Mysore and recently purchased a 2400 sq ft plot. You’re planning to construct a 7-flat apartment building, which you can rent for Rs 25k per flat. You have no debt and Rs 40 lakh in hand. The construction cost is Rs 1.6 crore, so you need a Rs 1.2 crore loan. You sold a struggling business, have two flats in Bangalore earning Rs 50k rent, and make another Rs 50k from a side business. You live in a leased house, and your wife supports taking a loan for the construction. You have a high CIBIL score of 820 but are uncomfortable with a Rs 1 lakh income.

Evaluating Your Financial Position

1. High CIBIL Score

Your CIBIL score of 820 is excellent. It shows you’re responsible with credit and can likely secure a loan with favorable terms.

2. Income and Expenses

Your total monthly income is Rs 1 lakh. You have no debt but plan to take a Rs 1.2 crore loan for construction. This loan will add significant financial pressure.

3. Existing Assets

You own two flats in Bangalore, generating Rs 50k monthly. These are valuable assets and a steady income source.

4. Risk Assessment

Constructing an apartment building is a big investment. It’s essential to consider risks like construction delays, cost overruns, and rental market fluctuations.

Considering the Loan

1. Loan Amount and EMI

A Rs 1.2 crore loan is substantial. With an average interest rate of around 8%, the EMI will be about Rs 1.1 lakh for 20 years. This is more than your current income.

2. Construction Costs

Ensure you have a detailed and realistic estimate of the construction costs. Account for unexpected expenses.

3. Rental Income

Renting out 7 flats at Rs 25k each will generate Rs 1.75 lakh monthly. This income can help cover the EMI and provide some surplus.

Exploring Alternatives

1. Phased Construction

Consider constructing the building in phases. Start with fewer flats and expand as you generate rental income and save more.

2. Using Existing Assets

Sell one of your Bangalore flats if needed. This can reduce the loan amount and financial pressure. This can be a difficult decision but may be necessary for long-term financial health.

3. Building Your Side Business

Focus on expanding your side business. Increasing this income can provide more financial stability and reduce reliance on rental income.

Understanding the Rental Market

1. Market Research

Research the rental market in your area thoroughly. Ensure there’s demand for rental properties at the rates you expect.

2. Rental Agreements

Have clear and enforceable rental agreements. This helps ensure a steady rental income and reduces the risk of defaults.

Seeking Professional Guidance

1. Certified Financial Planner

Consult a Certified Financial Planner (CFP). They can provide a detailed financial plan and investment strategy tailored to your situation.

2. Legal and Tax Advice

Seek legal and tax advice regarding property construction and rental income. This ensures compliance and optimizes your tax liabilities.

Assessing Long-Term Goals

1. Financial Independence

Consider your long-term financial goals. Aim for financial independence and a stable income that covers all your needs comfortably.

2. Diversification

Diversify your investments. Don’t put all your money into real estate. Explore mutual funds, fixed deposits, or other investment options.

Exploring Mutual Funds

1. Importance of Mutual Funds

Mutual funds are an excellent way to grow your money. They pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.

Advantages of Mutual Funds

Diversification: Spread your risk across various assets.

Professional Management: Managed by experienced fund managers.

Liquidity: Easy to buy and sell units.

Affordability: Start with a small amount and gradually increase.

Types of Mutual Funds

Equity Funds: Invest in stocks. Higher risk but potentially higher returns.

Debt Funds: Invest in bonds and other fixed-income securities. Lower risk, stable returns.

Hybrid Funds: Combination of equity and debt. Balanced risk and return.

2. Power of Compounding

Investing early in mutual funds harnesses the power of compounding. Compounding means earning returns on your returns. The longer you invest, the more your money grows exponentially.

3. Systematic Investment Plan (SIP)

SIP is a disciplined way to invest in mutual funds. You invest a fixed amount regularly, regardless of market conditions. This helps in averaging out the cost and reduces market timing risk.

Benefits of SIP

Disciplined Savings: Forces you to save regularly.

Rupee Cost Averaging: Buys more units when prices are low and fewer when prices are high.

Convenience: Automated investments from your bank account.

Evaluating Risks and Returns

While mutual funds are beneficial, they come with risks. Understand the risk level of each fund and align it with your risk tolerance.

1. Equity Funds

High Risk, High Return: Suitable for long-term goals.

Market Volatility: Prices can fluctuate significantly.

Long-Term Growth: Historically, equities have outperformed other asset classes over the long term.

2. Debt Funds

Low Risk, Stable Return: Ideal for short to medium-term goals.

Interest Rate Risk: Returns may vary with changes in interest rates.

Capital Preservation: Focus on preserving capital while earning modest returns.

3. Hybrid Funds

Balanced Risk and Return: Good for medium-term goals.

Asset Allocation: Diversifies across equity and debt.

Volatility: Less volatile than pure equity funds but riskier than debt funds.

Final Insights

Constructing an apartment building is a significant financial commitment. With your current income and assets, taking on a Rs 1.2 crore loan is risky. Consider phased construction, selling an existing asset, or expanding your side business to reduce financial pressure.

Invest in mutual funds to diversify your investments and achieve long-term growth. Consult a Certified Financial Planner for personalized advice and create a comprehensive financial plan. Remember, the key to financial success is disciplined saving, prudent investing, and continuous learning.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: At 40 years old, you have an important decision to make regarding your financial future. Let's explore the advantages of setting up a Systematic Withdrawal Plan (SWP) in mutual funds compared to buying a flat for rental income.

Setting up an SWP in Mutual Funds
Advantages:
Flexible Withdrawals:

With an SWP, you have the flexibility to withdraw a fixed amount at regular intervals, providing a steady stream of income to support your financial needs, including retirement planning.
Diversification Benefits:

Mutual funds offer diversification across various asset classes, reducing concentration risk and potentially enhancing long-term returns compared to investing solely in real estate.
Professional Management:

Mutual funds are managed by professional fund managers who actively monitor and adjust the portfolio based on market conditions, aiming to optimize returns while managing risk.
Tax Efficiency:

SWP withdrawals from mutual funds may enjoy tax benefits, especially if held for the long term, with certain equity funds qualifying for capital gains tax exemption after a holding period of one year.
Buying a Flat for Rental Income
Advantages:
Stable Rental Income:

Renting out a flat can provide a stable source of income, which may be attractive for covering ongoing expenses or supplementing other sources of income.
Tangible Asset:

Owning real estate provides tangible asset ownership, offering potential capital appreciation over time and serving as a hedge against inflation.
Portfolio Diversification:

Real estate investments add diversification to your overall portfolio, reducing risk by spreading investments across different asset classes.
Disadvantages:
Liquidity Constraints:

Real estate investments are relatively illiquid, making it challenging to access funds quickly if needed, especially during emergencies or market downturns.
High Initial Investment:

Buying a flat requires a significant upfront investment, typically financed through a substantial bank loan, which may strain your finances and limit investment diversification.
Maintenance Costs:

As a landlord, you'll be responsible for ongoing maintenance, repairs, and other associated costs, which can erode rental income and impact overall returns.
Conclusion
Given the advantages of SWP in mutual funds, such as flexibility, diversification, professional management, and potential tax benefits, it may be a more suitable option for generating regular income and building a retirement corpus. However, it's essential to assess your risk tolerance, investment goals, and financial situation carefully before making a decision. Consider consulting with a Certified Financial Planner to develop a personalized financial plan aligned with your objectives and aspirations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: You have salaried/professional or business income as your loan interest will depend on that.
You don't need FD's as your investment is a long term investment.
Take maximum loan available to you as per the EMI payment.
You can get loan at 8.4/8.5% loan interest.
Sunil Lala, CFP
https://m.facebook.com/slwealth/

Ans: Buying the Property: Assessing Your Options
You are considering purchasing a flat priced between Rs 18-22 lakh. You have Rs 11 lakh maturing soon and Rs 1.5-2 lakh in PF balance. You also have gold worth Rs 10 lakh. You are contemplating whether to take a home loan of Rs 10-12 lakh or use your savings and assets.

Evaluating the Home Loan Option
Pros of Taking a Home Loan:

Liquidity: You maintain liquidity by not using all your savings.
Tax Benefits: Home loans offer tax benefits under Sections 80C and 24(b).
SIP Continuation: You can continue your SIPs, growing your investments over time.
Cons of Taking a Home Loan:

EMI Burden: Monthly EMIs can strain your take-home salary of Rs 39,500.
Interest Cost: You pay interest on the loan, increasing the total cost of the property.
Financial Stress: Managing EMIs and other expenses might be challenging.
Evaluating Using Savings and Assets
Pros of Using Savings and Assets:

Debt-Free: No loan means no EMI burden.
Interest Savings: You save on interest costs.
Financial Freedom: No monthly EMI, allowing better cash flow management.
Cons of Using Savings and Assets:

Reduced Liquidity: Using all savings and assets reduces your emergency fund.
No SIPs: Stopping SIPs might impact long-term wealth creation.
No Tax Benefits: You miss out on home loan tax benefits.
Analyzing Monthly Cash Flow
Your take-home salary is Rs 39,500. Let's analyze the cash flow for both options:

With Home Loan:

EMI (Assumed): Rs 10,000 (approx)
SIP (10% of EMI): Rs 1,000
Total Outflow: Rs 11,000
Remaining cash for expenses and savings: Rs 28,500

Without Home Loan:

Gold Purchase: Rs 15,000 per month
No EMI: Rs 0
SIP Continuation: Assuming Rs 1,000 (for continuity)
Remaining cash for expenses and savings: Rs 23,500

Considering the Future
Children's Education: Your daughters are 19 and 14. Higher education costs might rise soon. Ensure you have funds for their education.
Emergency Fund: Maintain an emergency fund for unforeseen expenses.
Retirement Planning: Continue to invest for your retirement.
Professional Insights and Recommendations
Balanced Approach: Consider a mix of both options. Use part of your savings and take a smaller home loan. This keeps some liquidity while reducing loan burden.
Prioritize SIPs: Ensure you continue your SIPs. SIPs are crucial for long-term wealth creation.
Gold Investment: Buying gold every month can diversify your portfolio. However, consider market fluctuations.
Emergency Fund: Always maintain an emergency fund. Avoid exhausting all savings on the property.
Tax Benefits: Utilize home loan tax benefits if you opt for a loan. It can reduce your taxable income.
Final Insights
Buying a property is a significant decision. Evaluate all aspects before proceeding. Consider both immediate and future financial needs. Balancing liquidity, tax benefits, and long-term investments is key. Make a decision that aligns with your financial goals and stability.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in