Common wisdom refrains us from using debt to make investments. We have been repeatedly warned against borrowing money to make/create investments in financial markets such as stocks, mutual funds, etc. However, this picture is drastically different when it comes to investing in real estate.
By effectively and systematically leveraging the power of debt, you can enjoy appreciation on a property that you have purchased predominantly with borrowed money. In simpler terms, by investing in a property by taking a home loan, you are making returns on 100% of the property value although the outgo from your pocket is just 20% of the property cost.
Banks and HFCs (housing finance companies) are more than willing to lend money to borrowers with a clean and credible credit history and background. And not just residents but even NRIs are eligible to avail a home loan to purchase property in India. By leveraging their salary slips or business financials, NRIs can apply for a home loan through the mails, from anywhere in the world and from the comforts of their homes or offices.
Leveraging debt has the following advantages :
i) Bigger Investments : Using home loans you can invest in assets that cost approximately 4 times the investable capital that you have. i.e. if you have Rs.40 lakhs to invest, you can invest in property/properties worth Rs.1.6 crores; if you have Rs.50 lakhs corpus, you can purchase properties worth Rs.2.5 crores.
ii) Exponentially Higher Returns : When you invest by taking a home loan, you are basically enjoying capital appreciation on 100% of the property value whereas your investment is just 20% of the project cost. Moreover this capital is brought over a period of 1.5 to 2 years. Hence the return on your capital is exponentially higher compared to the notional capital gains percentage.
Example : Say you bought a property worth Rs.2 crores by paying a sum of Rs.40 lakhs from your own funds – which is 20% of total unit value – and you fund the balance 80% through a home loan. Over the next 3 years, you pay approximately Rs.22 lakhs as interest or EMI on the home loan. In the meantime, your property would have appreciated from Rs.2 crores to say Rs.3 crores (a conservative increase of 50% over 3 years which is very practical and achievable). Now although you think you have made only 50% returns on investment, you have actually made a return of 160%!
Here is how : Your capital gain is Rs.100 lakhs (a)
Your investment (own funds ) is Rs.62 lakhs (investment of Rs.40 lakhs + Rs.22 lakhs as interest on the loan). (b)
Hence your ROI = a/b = 160% (rounded-off)
Hence investing using home loan is the best way to create wealth with least possible capital/corpus.
iii) Incredible Tax Benefit : Resident Indians are eligible for incredible tax benefits when they take a home loan. The principal amount and the interest paid on the loan are eligible for deduction from your taxable income (under Section 80C and 24)*. Buy a second home using home loan and the tax benefits are even greater!
iv) Assurance of Clean legal Title : Nowadays all top builders are getting their projects PRE – APPROVED by all the leading banks and HFCs. When a bank/HFC pre-approves the property, it validates and approves the legal title of the property which in turn means that investors need not worry about the legal sanctity of the property title / deed that they are purchasing and can totally rely on the approval of the banks as a guarantee of cleanliness of title.
Hence the best way to invest is by leveraging home loans. Find out your loan eligibility and then short list your projects accordingly to maximize your investment efficiency.
At G&C, we provide end-to-end solutions to our clients and as a part of this commitment, we assist our clients in procuring home loans from India’s best banks and HFCs (housing finance companies).
Contact us to get a free assessment of your loan eligibility which can then give you an idea of how big you can invest using the corpus that is available to you, i.e. you can decide on investment size (whether you should invest in a 1 crore, 1.5 crore or 2 crore property or more etc).
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