33.36 Leverage-Secret Boost to RE Investing

• One of the biggest perks of Real Estate is that it can be built on leverage i.e. if it is done smartly and that’s exactly what the rich folks do.
• They make use of smart debt, get it at good rates, and own a bunch of cashflow assets, but the flip side is also true.
• If you take debt at the wrong time, without taking care of your financial needs, then this can destroy you.

When should you take leverage to buy Real Estate?

• Build your emergency funds first
• Have liquid growth assets in your portfolio and then only look to invest in Real Estate.
• As an example:
  • If your portfolio is 50L, then you get a 1Cr house on loan. That makes sense.
  • But if you put 80-100% of your portfolio into Real Estate, that’s just a bad strategy and you are doomed from the get-go

What prerequisites do you need to meet to buy a 1Cr property?

• A good rule to follow here is the 3-20-33-40 rule.
• This rule states that your maximum budget for the house should be 3x your yearly family income.
  • In most cases, this would not be a good amount
  • In such situations, you can consider selling some assets like land, etc. to create this extra amount
• Take a Home Loan of 20 years
• Your EMI should not exceed 33% of your household income.
• Have the capability to pay 40% as a down payment
  • How much you should use will depend on interest and ROI.

Minimum financial qualifications

To buy a house worth 1Cr, these should be your minimum financial qualifications:

1. You should have 20-40 Lakhs for making the downpayment. Ideally 20% ie: 20L can be used for the downpayment.
2. Rest 80 Lakhs (let's assume you take a loan); EMI payments would be around 90K/month
3. This should NOT exceed 33% of your household income. Therefore, your household salary should be: 2.7 Lakhs

Anything more puts massive stress on your financial well-being.

Alternative options

I still want to buy a house. And, my household salary is NOT 2.7Lakhs, what should I do?
Three options:

1. Own a house in a different city (where the cost of property is lower)
2. Buy a smaller unit (you might not like it)
3. Save 40 lakhs first. Then buy.

This is not a foolproof plan. But, hopefully, the math will help you avoid disastrous decisions.

People go bankrupt owning a house when a downturn hits.
The builder stops the building & delays possession. But, the EMIs keep going out of your pocket. So controlling that should be your primary goal.

Real Estate and Leverage Globally

In Dubai, you can give 10% to lock in a property, and then you have 4 years to resell it if you want before you need to pay off the entire amount.
This happens because the chances of people exiting for speculative purposes are very low, since people have incentives to stay invested (Golden Visa).

This is different from in India.

If the same thing is carried out in India, it will work as a pure speculation asset.
If a real estate bust happens, you will be stuck in this deal. Therefore,

• Understand how much loan you should take (where EMI would be 30-40% of your household income)
• When you should take (when interest rates are low, fixed)
• When you should pay more loans quickly vs not.

Below is a chart of the Mortage Rate (Home Loan) in the US:

Let me conclude this by sharing a case study of Robert Kiyosaki:

Robert Kiyosaki owns 15,000 houses. How?

[1] He is a believer in REAL ASSETS.

A real asset is something that has a limited fixed supply.
So Robert Kiyosaki likes to own REAL assets.

[2] He buys high-yield properties.

For e.g. if you buy a house at 1Cr, you get a rent of 5Lakh/year
Your rental yield is 5% and your property appreciation might (depends), might be 2-3%
If you buy HIGH yield property it creates a massive advantage for you.

[3] He mortgages the property when the interest rate is low.

Eg. if the interest rate falls, you can technically mortgage the property) and borrow money.
Since these are mortgage-backed loans (the asset is the house), you are likely to get a loan.
This is a less risky loan for a bank.

If you do this when the interest rates are LOW, you have to pay a lower EMI (pretty sensical).
You lock in long-term low interest rates.

[4] He then uses the rental yield (or cash flow) to offset the EMI.
Eg. if your EMI payment from the house is 1L/month and, you are making a rental yield of 1L/month, essentially, you are getting the house for almost free.

You keep playing this game over and over again. Decades, after decades.

Now the biggest issue is to find properties that have a very high rental yield, which offsets your EMIs.

Can you do this in India? Absolutely yes.
The trick is to understand this space properly.

Source

• Akshat Shrivastava 18/30 days Newsletter.