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Should I develop the land or add a floor for rent?

Ramalingam Kalirajan |10984 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Nov 20, 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 - Nov 16, 2024Hindi

Hi there - I have the following real estate portfolio - India - 2 Apartments fully paid and a single storey landed property (ancestral), 1 overseas property valued at 5 CR with around 2.4 cr loan pending. Currently, the landed property in India is rented out and I receive a meagre rent monthly of 10K INR. I was thinking of handing over to a builder to build an apartment complex and keep 3 apartments for myself based on what the builders offers (Of course I will have to buy 1 apartment and have the rent from those offset the other 2 apartments that the builder will give me). Either this, or I build another level on top and rent out the two separately. I this case I will have to invest additional 30L. Financially, I was wondering what would be a better option? I have no intention of staying there for another 15 years at least.

Ans: Your real estate portfolio is diverse and well-structured, with properties in India and overseas. This portfolio offers you flexibility, but it also requires careful decision-making to maximise returns and reduce liabilities. Let us assess your current situation and evaluate both options you are considering.

Strengths in Your Portfolio
Debt-Free Indian Properties: Fully paid apartments and an ancestral landed property offer financial stability.

Income Generation: While the rent of Rs 10,000 is modest, it provides a consistent income stream.

Overseas Property: Although it has a pending loan, its Rs 5 crore valuation indicates strong equity.

Challenges to Consider
Low Rental Income: The Rs 10,000 rent from the landed property is not financially impactful.

High Loan on Overseas Property: The Rs 2.4 crore liability needs to be managed strategically.

Future Commitment: Both your proposed options require significant time, effort, and financial resources.

Assessing Option 1: Handing Over to a Builder for an Apartment Complex
Advantages
Increased Asset Value: Converting the property into an apartment complex increases its market value.

Additional Income: Renting out multiple apartments can yield higher rental income.

Minimal Upfront Investment: The builder covers most costs, reducing your financial burden.

Ownership of Multiple Apartments: Retaining three apartments ensures future flexibility.

Disadvantages
Dependence on Builder’s Offer: The deal heavily depends on the builder’s terms and reliability.

Extended Timelines: The construction period could delay income generation.

Market Risks: Renting or selling multiple apartments depends on market conditions.

Key Considerations
Assess the builder’s reputation and financial stability.
Ensure transparent legal agreements with clear terms and timelines.
Evaluate the market demand for apartments in the location.
Assessing Option 2: Adding a Level and Renting Out Units
Advantages
Control Over Property: You retain full control over the construction process.

Quicker Completion: Adding a level is faster than constructing an entire complex.

Modest Investment: Rs 30 lakh is a smaller upfront commitment compared to other options.

Steady Rental Income: Renting out two units provides immediate and predictable cash flow.

Disadvantages
Limited Growth Potential: This option adds only incremental income and asset value.

Construction Challenges: Managing permits and construction quality requires your involvement.

Upfront Cost: The Rs 30 lakh investment may impact your liquidity.

Key Considerations
Plan for the Rs 30 lakh investment without disrupting other financial goals.
Ensure proper permissions for adding another level to the property.
Research rental demand and pricing for the additional units.
Financial Implications
Loan on Overseas Property

Prioritise repaying the Rs 2.4 crore loan to reduce interest costs.
Consider liquidating underperforming assets to reduce liabilities.
Rental Income Potential

The builder option may yield higher income but involves delays and uncertainties.
Adding a level provides immediate income but limits long-term growth.
Liquidity and Cash Flow

Avoid over-committing funds to construction or renovation.
Maintain an emergency fund to address unforeseen expenses.
Alternative Investment Suggestions
Instead of solely focusing on real estate, you can consider diversifying into financial instruments for balanced growth:

Actively Managed Mutual Funds
Offer consistent growth potential with professional fund management.
Provide liquidity and flexibility to align with financial goals.
Hybrid Funds
Blend equity and debt investments for stability and moderate growth.
Ideal for generating consistent income while preserving capital.
Systematic Withdrawal Plans (SWP)
Generate monthly income from investments while ensuring capital preservation.
Provides a reliable alternative to rental income.
Regular Funds vs Direct Funds
Regular funds ensure expert guidance and portfolio optimisation by Certified Financial Planners.
Direct funds require self-management, which may lead to errors and missed opportunities.
Tax Considerations
Capital Gains Tax: Selling any property will attract long-term or short-term capital gains tax.
Tax Savings: Reinvesting proceeds in financial instruments can optimise tax liability.
Final Insights
Both options for your ancestral property have pros and cons. The builder option offers long-term growth but requires careful negotiation and patience. Adding a level provides immediate income with lower financial risk.

Diversifying into financial investments can complement your real estate portfolio, providing liquidity and consistent returns. Assess your financial priorities and future plans before committing to a decision.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Asked on - Nov 26, 2024 | Answered on Nov 26, 2024

Thank you for your feedback. I am already investing around 1L every month in a mix of Mutual Funds, ULIPs, LIC and Guaranteed Plans with around 70K allocated to MF. Additionally around $1500 per month are allocated to overseas ETF, Stocks,

Ans: Your current allocation shows disciplined investing across multiple avenues. To optimise your portfolio:

Increase focus on Mutual Funds: Allocate more towards actively managed funds, as they provide better growth potential than ULIPs or guaranteed plans, especially for long-term goals.

Review ULIPs and LIC plans: Evaluate their returns and consider redirecting funds into Mutual Funds if their growth potential is lower.

Diversify overseas investments: Consider balancing your overseas portfolio by including more actively managed international funds alongside ETFs and stocks.

Monitor progress: Regularly review your portfolio performance with a Certified Financial Planner to ensure alignment with goals and market conditions.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.