There are some properties that will attract you instantaneously. In case you are sure that the return on investment in terms of rental income capital appreciation is fair than you should find ways and means to build capital to buy this property.
Step-1 of How to Build Capital – Get aware of your income and expense patterns
In case you are new to real estate property investment then you first must learn how to manage your finances. Have a clarity on your status of income and expenses. This is very important before you approach a bank for home loan.
Your Income
Banks verifys your level of income from your last years income tax returns (you filed). This gives a very clear understanding to the banks that what was your income last year. So this worked well for your last year income. Suppose you have changed your job or got a good pay hike, so your income levels have changed after last year. In this case you will be required to produce the salary slips of last few months of this year. So now it is not hard for the bankers to estimate your credit rating on basis of which you will be granted a home loan.
Your Expenses
After you have analysed your income from point of view of a banked you need to pretty sure about your monthly/ annual expenses. Generally expenses like credit card bills, monthly rentals, electricity bills, car refueling, insurance premiums, etc. This awareness will be very helpful to you when you will face a personal interview with your banker.
Awareness on income and expenses will give you an estimate of how much you can save per month. This is one of the most effective ways of justifying your banker that you are capable of paying your monthly mortgages (EMI’s) in future.
Step-2 of How to Build Capital – Get aware of prices of property in your target area & calculate profits
Do your property research
The area in which you would like to buy a property is a very important decision from point of view of profitable investing (Here are some property evaluation checklist that will help you choose a profitable property). After you have zeroed down in one or two areas, start researching for the approximate prices / rates of property existing in that area. Try to analyze the rates in terms of per Sq.ft rates. This will help you easily compare between two properties. Comparing rates will help you to know that in which area the property is over priced and which is reasonable. You can do this research in three ways, (1) On Internet by using real estate portals like magicbricks, makaan.com, 99acres etc. (2) You can also visit the areas and talk to marketing offices of builders to get a feel of what they are offering for a property (1BHK, 2BHK, 3 BHK, Stereo apartments etc). (3) You can talk to people who already owns a property in that area. Talk to them about the facilities, difficulties, approximate prices of property in that area.
Do your property analysis
On basis of Monthly Rentals
Once you are fully aware of what prices you will pay to buy a property in particular area, you can start doing your affordability analysis. Suppose the total mortgage (monthly EMI’s) that you are supposed to pay to buy a property is Rs 20,000/ month and the rental income you can easily make for that house in that area is Rs 15,000, hence this way are able to pay a major part (75%) of your mortgage from rentals. This makes this property very profitable.
On basis of Capital Appreciation
Suppose the total cost of property is Rs 45,00,000. You made a downpayment of Rs 25,00,000 from your pocket and balance Rs 20,00,000 you availed home loan of 15 years (monthly EMI will be approximately Rs 20,000/ month). You have a target of selling this property after 3 years and by that time you have already paid:
| Rs. 25,00,000 | In form of downpayment |
| Rs 01,80,000 | In form of monthly EMI (Rs 20,000-Rs 15,000) x12months x 3 years |
| Rs 26,80,000 | Total Cost you paid for the property |
| Note: Area 1200 Sqft X Rate Rs 3,750/ Sq.Ft = Rs 45,00,000 | |
Assuming that the valuation of property increases from Rs 3,750/ Sq.ft to Rs 5,500/Sq.ft in three years then the value of house will be equal to Rs 66,00,000. After three years you will make profit as tabulated below:
| Rs. 66,00,000 | Selling Price of House (cash in hand) |
| Rs 27,00,000 | Payment of balance of home loan with penalty |
| Rs 26,80,000 | Total Cost you have already paid for the property |
| Rs 12,20,000 | Net Profit in Hand |
| Profitability = Net Profit / Cost you actually paid | |
| 45% | 12, 20,000/ 26,80,000 = 45% in three years |
| 13.2% | compounded interest per year is 13.2% per annum |
13.2% certainly beats inflation and adds extra cash (Rs 12,20,000) in your pocket in three years.
These days the bank will only finance 80% of the cost of your house. The balance 20% you need to put from your pocket (as downpayment). But in case you are able to find a house that already has a tenant living in it and is interested to continue then bank will consider this an additional and you can get away by paying much less downpayment. This is also one of the best way to manage the cashflow of your investment in case you find the property with already a tenant living in it. You will start earning the rental income straight away.
Step-3 of How to Build Capital – Approach your family or friends with calculation
The problem that most people face in the above calculation is in organizing the down payment (like Rs 25,00,000 in above example). But if your calculation is in place, then you can approach your family or friends with a proposal like a business plant and convince them to invest their portion with you. You call highlight them the payback time with capital appreciation. People generally will get impresses if you have everything jotted down on pen and paper with reasonable assumptions.
You can also have a contract kind of a thing with capital sharing and conditions of payback and return clearly defined on a legal paper.
Always do your calculation well so that any question or hick-ups you are able to answer with ease. After you have developed their interest the next step will be to show them the property that you wish to invest in. Take their advice and show them your thoughts. I can also suggest you to better look for a real estate agent as it is worth going through them. They may cost you some extra bucks but they are expert in their own fields. They will work for you full time and give the most useful advice.
To Conclude
So your approach to financing your house should be followed in steps as listed below:
Step 1 – Prepare your plan
Step 2 – Estimate how you will finance your investment
Step 3 – Lease your property on rent and start making income
Step 4 – Always be ready with your calculations that gives you an idea on over all profitability
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