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68-Year-Old Investor Asks: Is It Wise to Use Equity as Collateral for Apartment Construction?

Ramalingam Kalirajan |7635 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Aug 02, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Aug 02, 2024Hindi

Date: 02.08.2024 Dear Sir I am 68 yrs old. I have invested 40L in various equities since last 44 years & 50L in Equity based M/F’s since last 14 years. Current market value is around 1.8cr & 1.6cr respectively & it may grow by 20% CAGR. As per my assumptions in the next 7 years of period total market value will be around 10cr approx. Also I have a land property valued 3cr. Now I am planning to build 6 floor residential apartments on it. For this I need a fund around 2cr for construction & I am planning to raise funds from overdraft loans against my Equity shares & M/F at the rate 10.35%.approx I do not have any other source to raise the reqd. fund and I do not have any other liabilities. I am planning SWP of Rs. 10 lacs every year to repay interest on OD. Further I may sell out one floor to clear my overdraft loans after full construction. Are my thoughts correct in your opinion? I need your practical advice & guidance in this regard please. Thanks & Regards

Ans: Current Financial Situation

You have a strong investment portfolio worth Rs. 3.4 crore.
Your equity investments have grown well over 44 years.
Mutual fund investments also show good growth in 14 years.
You own a valuable land property worth Rs. 3 crore.

Proposed Plan

You want to build a 6-floor residential apartment.
You need Rs. 2 crore for construction costs.
Planning to take overdraft loans against equity and mutual funds.
Intend to repay interest through SWP of Rs. 10 lakh yearly.
Plan to sell one floor to clear overdraft loans.

Risks to Consider

Construction costs may exceed your estimates.
Market volatility could affect your investment values.
Interest rates on overdraft loans may increase.
Property market conditions may change.

Alternative Funding Options

Consider selling some equity or mutual fund units.
This could reduce your loan burden and interest costs.
Look into construction loans from banks.
They may offer better interest rates than overdraft loans.

Tax Implications

Selling investments may lead to capital gains tax.
Property sale will also have tax implications.
Plan for these taxes in your financial calculations.

Cash Flow Management

Ensure you have enough regular income for daily expenses.
Don't rely solely on investments for living costs.
Keep some funds aside for emergencies.

Investment Portfolio Review

Your portfolio has performed well over the years.
Consider rebalancing to maintain proper asset allocation.
Actively managed funds can help navigate market changes.

Construction Project Management

Get detailed cost estimates from reliable contractors.
Factor in potential delays and cost overruns.
Consider hiring a project manager to oversee construction.

Exit Strategy

Have a clear plan for selling or renting the apartments.
Research local property market trends.
Be prepared for possible delays in property sale.

Retirement Planning

Ensure this project doesn't jeopardize your retirement savings.
Keep a portion of your investments untouched for future needs.
Regular funds through CFP can provide ongoing guidance.

Finally

Your plan has potential but carries significant risks.
Consider less risky alternatives to achieve your goals.
Consult a Certified Financial Planner for personalized advice.
Regular review of your financial situation is crucial.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in

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