Hello sir my name is Muzammil I live in a small city in Karnataka Mysore I have recently purchased a plot of 2400sq ft I'm planning to construct an apartment building with 7 flats and rent it each flat I can rent it for 25k I don't have any debt I have around 40 lakh rupees the whole building construction cost is around 1.6 crore I need to take a loan of 1.2 crore should I go for it I recently sold my business which was going bad I have 2 flats in Bangalore I get rent of 50k I make another 50k doing a little side business Im living in leased house my wife saying we need to take loan and go ahead with construction I'm liable for loan I have a cibil of 820 what should I do I'm not comfortable with the 100k income

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