Should I Stay Loan-Free and Rent? An Architect's Dilemma

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: You are evaluating whether to buy a flat worth Rs. 1.25 crore or continue renting. Let us assess this situation considering financial, practical, and retirement planning aspects.

 

Financial Considerations
1. Monthly Cost Comparison

Current rent is Rs. 40,000 per month.
EMI for the home loan is Rs. 85,000-90,000 per month.
Subsidy from your organisation reduces the EMI cost by Rs. 28,000.
Tax savings on housing loan interest further reduce the cost by Rs. 5,000.
Net additional cost to you is Rs. 15,000-20,000 per month.
 

2. Opportunity Cost of Down Payment

Buying the flat requires Rs. 45 lakh as a down payment (including registration).
Investing this amount in mutual funds for 5-6 years can yield higher returns.
Evaluate if your current mutual fund contributions can bridge this gap later.
 

3. Post-Retirement Loan Liability

Your home loan tenure is 12 years.
After retirement, loan repayments will depend on other income sources.
Selling the flat to clear the loan may not always fetch expected value.
 

4. Rent vs. Ownership Costs

Owning a flat involves maintenance, property tax, and repair costs.
Consider if these costs are affordable post-retirement.
Renting offers flexibility and avoids these additional expenses.
 

Lifestyle and Practical Aspects
1. Stability vs. Flexibility

Owning a flat provides stability and security of residence.
Renting offers flexibility to relocate post-retirement if needed.
 

2. Emotional Value of Owning a Home

Buying a home can give emotional satisfaction and a sense of achievement.
Ensure this decision aligns with your long-term financial health.
 

3. Rental Yield Analysis

Flats often have low rental yields compared to their cost.
You may not earn substantial rental income after clearing the loan.
 

Retirement Planning
1. Impact on Retirement Corpus

Redirecting Rs. 20,000 to mutual funds can grow significantly over 6 years.
This additional corpus can support your post-retirement lifestyle.
 

2. Liquidity Needs Post-Retirement

Flats are illiquid assets and may take time to sell when needed.
Liquid investments ensure easy access to funds during emergencies.
 

3. Alternate Strategies

Continuing to rent and investing in mutual funds may create better retirement wealth.
Combine equity and debt funds for an optimal mix of growth and stability.
 

Tax and Subsidy Considerations
1. Housing Loan Subsidy

The 50% interest subsidy reduces your effective EMI significantly.
This benefit reduces the immediate cost of buying the flat.
 

2. Tax Savings on Interest

Tax benefits under Section 24 further reduce the financial burden.
These savings must be factored into your overall cost analysis.
 

Final Insights
Buying a flat offers stability but increases financial obligations. Continuing to rent allows flexibility and creates additional retirement wealth. Evaluate the long-term implications on your retirement corpus before deciding. Align this decision with your financial goals and retirement needs. Engage with a Certified Financial Planner to create a detailed retirement plan and optimise your investments.

 

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Key Financial Factors to Consider
Option 1: Buying the Flat
EMI Costs

EMI: Rs. 85,000-90,000 monthly for 12 years.
Net EMI Cost (Post subsidy and tax saving): Rs. 15,000-20,000 per month.
Rental Saving

Buying eliminates rent, saving Rs. 40,000 monthly.
Subsidy Benefit

50% interest subsidy reduces your EMI burden by Rs. 28,000 per month.
Tax Benefits on Home Loan

You save approximately Rs. 5,000 monthly in taxes on interest payments.
Plan to Sell Post-Retirement

Selling the flat in 5-6 years may or may not yield significant appreciation.
Real estate liquidity can be unpredictable.
Option 2: Continuing to Rent
Current Costs

Rent: Rs. 40,000 per month.
No additional EMI burden.
Investment Opportunity

Allocate Rs. 20,000 monthly (saved from net EMI cost) to mutual funds.
This investment grows significantly in 5-6 years.
Flexibility

Renting offers flexibility in case of post-retirement relocation.
Detailed Analysis
Buying the Flat: Pros and Cons
Pros:

Owning a home offers emotional satisfaction.
Subsidy and tax savings reduce EMI burden.
Rent savings (Rs. 40,000) offsets the EMI.
Cons:

Requires additional Rs. 15,000-20,000 monthly for EMIs.
Real estate appreciation is uncertain over 5-6 years.
Selling post-retirement involves transaction costs and market risks.
Renting and Investing: Pros and Cons
Pros:

Avoids the hassle of a large loan and associated liabilities.
Rs. 20,000 invested in equity mutual funds can grow significantly.
More flexibility to relocate post-retirement.
Cons:

Rent payments continue with no ownership asset.
Miss out on interest subsidy and home loan tax benefits.
Scenario Comparison
Option 1: Buying the Flat
Total Outflow: Rs. 15,000-20,000 monthly (EMI after adjustments).
Asset Created: A flat worth Rs. 1.25 crore, potentially appreciating in value.
Risk: Real estate value may stagnate or decline in the short term.
Option 2: Renting and Investing
Total Outflow: Rs. 40,000 monthly in rent, plus Rs. 20,000 invested in mutual funds.
Investment Growth: Assuming 10% CAGR, Rs. 20,000 per month grows to Rs. 16 lakh in 5 years.
Risk: Market volatility may impact mutual fund returns.
Certified Financial Planner’s Suggestion
Based on your financial profile and goals, here is a balanced recommendation:

Leaning Towards Renting and Investing

Renting gives flexibility and avoids real estate risks.
Invest the additional Rs. 20,000 in equity mutual funds for better returns.
A diversified portfolio may provide more liquidity and growth by retirement.
If Emotional Value of Ownership Matters

Buy the flat only if you are confident about the real estate market in your city.
Ensure the flat is easily sellable in 5-6 years.
Carefully assess the costs and expected returns before committing.
Final Insights
Buying a flat works best if real estate appreciation outpaces mutual fund growth. However, this is uncertain in a short horizon. Renting and investing in mutual funds is a more flexible and potentially rewarding option for retirement planning.

Take a prudent decision considering your priorities and risk tolerance.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment