Subra one does not know whether I will pop off at 45 or like A K Hangal at the age of 98. So in order to live peacefully, I need to create a serious amount of income and wealth. – So said a reader who is about 40 years of age.
He also said ‘the only way I can do that is by leveraging and buying a lot of real estate’.
Ok it goes somewhat like this…Let us say a person earns Rs. 250,000 per month, after expenses, say he has about 150,000 available for paying EMI for a house. It means he can buy a house worth Rs. 1.75 crores – make a Rs. 25,00,000 down payment and borrow Rs. 1.50 crores. He can give the house on rent and earn about Rs. 500,000 as rent (annual).
After 4 years (by which time real estate will double, right) he can sell the house for Rs. 3.5 crores and buy another house for Rs. 6 crores. Rs. 2.5 crores will be a loan and on this he will have to pay Rs. 2.5L per month as an EMI….
After another 4 years….blah blah….
I am sure you are getting the hang.
Will this work? Have people tried this before? What is the risk?
Well it will work for sure. However for this to be a real success you should have a real big PORTFOLIO already so that if something goes wrong, you have a fall back option.
What are the risks:
-to repay the loans the current income has to be enough so that negative leveraging does not affect the lifestyle
-the surplus on a monthly basis should remain constant or keep increasing so that the EMIs can be repaid
- the house has to appreciate by a rate higher than the interest rate for long periods of time.
- the house has to be on rent continuously and there should be no gaps while being on rent
- if the income stops for any reason whatever the landlord should be able to sell at a price high enough so that the loan can be repaid, AND there is a surplus left.
This is a high risk strategy http://www.subramoney.com/2010/03/robert-kiyosaki-understanding-is-an-issue/which does not suit me at my age, net worth, and my love for equity.
Negative Gearing is not something which I like too much, and have benefited being conservative…in the past….
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