Benefits of taking a loan in india | How to take loans to make money.

How to take loans in India | Take loans to make money

Hi everyone, welcome to today’s article. So, I recently took a loan of one crore rupees in order to buy a villa in Goa. In this article, I am going to help you understand the math behind why I have taken that loan, what benefits am I going to derive out of taking that loan. More specifically, I will tell you how I am going to Forex my investment almost in the next 10 years using this loan.

I will show you the map behind it. In the second half of the article, I will help you understand how you can benefit by taking loans yourself. Please understand that this is a dangerous game. Please watch this article entirely only then you will be able to understand the concept. 

This is not an entertainment article. You are putting your hard-earned money on the line, so please understand the concept behind it. I will speak from very practical experiences. If you like the content, please press the like button. 

It would allow these types of articles to reach out to more people. In fact, do press the like button and we will get started. Also, this article has been brought to you by upGrad. More about them subsequently on the article. So let me take you to my whiteboard and start explaining the context.

I have recently purchased a villa in Goa. Now, what do I own? Let me give you a very quick understanding. So I own a villa; it’s a constructed Villa. I own the land, and it has a running business on it. 

What is the running business? It’s Airbnb, and the property is already listed on Airbnb and it is already generating rental income. So, this is the nature of the investment that I have made. Now, how have I been able to finance this? So, I have taken a loan of one crore rupees. I have invested right off the bat 90 lakhs as down payment. 

Now, for this one crore rupees, I am paying an EMI of 80,000 rupees monthly. And how much money am I making through this Airbnb rental business? I am making roughly 81,000 rupees. So, what is my outflow on every month basis? 

It is close to zero because I am making 81,000 rupees, and I am paying an EMI of approximately 80,000. So, 81,000 rupees so it gets nullified and my investment amount comes out to be 90 lakh rupees. 

So, I hope all of us are aligned up until this point. Now, you will have a set of natural questions. He accept how are you making 81,000 rupees? Are you not investing your time running Airbnb business? 

That itself is a full-time headache. So, okay, let me give a very quick context there. So, there is an Airbnb manager whom I have hired. He will be paying me 81,000 rupees. So, I am in a way sub-renting it. 

Now, you will naturally say that hey, how are you making like 81,000 rupees? So, I will show you all the documents when I give you a property tour, but for the timing let us assume that I am able to make 81,000 rupees. So now, let us move to 2032 and let us assume that I get a horrible return on this property. 

So, what is the absolute worst-case return that I will get? Absolute worst-case can be zero, but let us talk about a slightly more realistic number. Let’s assume a 2X growth in the next 10 years. This is almost equal to a fixed deposit return. 

Then at what price will I be able to sell this? I will be able to sell it at roughly 4 CR. Now, here is the magical thing that my investment amount was 90 lakh now I’m able to flip this property at 4cr rupee so what is the amount of return that I’m making.

I am almost 4xing my gain in the next 10 years by investing in a slightly more safer instrument. For example, a well-protected land on which a running business is already there. 

It is relatively safe; it is not as if someone will do kubzah on it. So, by investing in a sensible instrument, I have been able to Forex my money. Assuming a really bad rate of return, you might have a natural question for me, that hey, why did you not outright buy this? 

Why did you decide to take a loan on the property? Multiple reasons. Number one, when you take a bank loan while purchasing a property, the bank itself does the verification of your property, so you are safe; you are not getting into some disputed property. 

This is reason one. Number two, the interest rate environment right now is favorable for taking a loan, so right now I am getting this interest rate at roughly seven and a half, eight percent. 

In the future, it might go up to 10 also, so I am taking a fixed loan on it, not a floating loan. Number three, I will be able to claim tax benefit on the interest. Number four, I will be able to show a little bit of it as a business expense. 

So, there are a lot of things at play; therefore, I have taken a loan; I have not outright changed it. Fifth and final very important point is that I can keep on playing this game. For example, if I can identify 10 such more properties, then I need to have the capability to make this down payment, right? 

So, therefore, I have not paid the entire thing outright, but I have taken a loan. With this equation out of the way, let me now systematically help you understand under what circumstances you should also take a loan and how you should go about playing this game.

So first and foremost, when you are taking a loan, you must have a very clear understanding whether you are taking that loan in order to purchase an asset or you are taking that loan for purchasing liabilities. 

Now, the definition of asset and liabilities itself differs from person to person. For example, if you call up a CA and check with him or her that is a car an asset or a liability, the CA might say that it is an asset. 

But according to finance people like me, a car is a liability; in fact, it is a very big liability. Many of you might be taking EMIs on purchasing iPhones, or iPhone 14 has come, I’m going to buy it on the first day and take an EMI on my head, or this credit card is giving me like 50 rupee cashback, so I’ll go and spend like 50,000 rupees on taking some kind of loan. 

So please understand that you should generally avoid taking loans for liabilities. Let me just put some context; if you’re a regular viewer of my channel, you would already understand the difference between asset and liability, but a very quick explanation there.

So, assets are things that put money into your pocket. For example, the villa that I’m purchasing, how is it putting money into my pocket? I will be getting a cash flow in terms of Airbnb renters.

 

I will pick that cash flow, and I will service my loan so that becomes an asset purchase for me. On the flip side, if you are purchasing iPhone 14, then what is happening? Whether you are getting a zero-cost EMI, whether you are getting one percent EMI or whatever EMI you are getting, you are still purchasing a liability. Why? Because this takes money out of your pocket every single month; that EMI is something that you pay month on month.

So then come second point, that what type of asset you should purchase, and the natural response here is purchase good assets. So, what is the definition of good assets? Good assets are assets whose value is likely to continue going up in time; that is how I would define good assets. 

A classic case in point would be the land versus flat debate. For example, land is finite; if you are purchasing land, most likely scenario is that it will go up in value. 

But on the flip side, there is a very high probability that the value of a flat will go down with time. Why is that the case? Let me quickly, quickly explain it.

Now, here is the supply and demand curve of flats. Now who do you think controls the supply of flats? Who decides that a hundred more units of flat should be added? It is the Builder. If they have financing, if they have already procured a land, they can easily create a hundred more units. 

So, understand this from an example: It’s 2022; you purchase a flat worth 2 crore rupees. Now, there is some kind of recession, all the construction has been stopped. You’ll be very happy that hey, the supply of flats is not going up; you will be able to sell your stuff. 

Okay, when you go out to sell your flat, what will happen? There will not be much demand because there is a recession underway or there is some kind of economic issue. Okay, then assume an optimistic scenario that okay, recession is out, everything is out, now the economy is getting back on track. 

Then what would happen? Builders would start constructing a lot of flats, so they will be able to move this supply. So, no matter how you look at it, when you purchase a flat, you are getting a bad deal. 

I’m not saying that you cannot sell a flat for a profit, of course, you can sell it if there is a boom in that particular region, etc., etc., but it’s harder to sell a flat profitably compared to land.

So, systematically speaking, which is a better asset? A land is a much better asset. Now, another way of judging a good asset is to compute the ROI of that asset or return on investment. So let us pick a couple of examples.

 

So, the first example is of upscaling. For example, let’s say that you’re spending 20 lakh rupees in order to complete your MBA. Your pre-MBA salary is 5 lakh rupees, and after your MBA, you get a package of 10 lakh Rupees. Then should you be taking a loan to do this MBA? The answer is yes, you should definitely do it because the ROI computation tells you that this asset is good. Similarly, please check some of the best courses that I’ve curated from upGrad; it is there in the description box. According to me, if you do these types of good courses from upGrad, there is a very high likelihood that the ROI of your investment is going to be positive.

Now comes the second good asset. For example, if you are taking a loan to create a business and if you take a 10 lakh rupee loan, and after taking a loan, you are able to make a profit of 3 lakh rupee a year, should you take that loan? The answer most likely again would be yes. It depends on a lot of things, but yes, if you have the confidence that you will be able to turn your business positive and that loan helps you, then you should definitely do it.

Now, can I give you some kind of a general rule as to how to do this assessment? That okay, 10 lakh loan, 3 lakh profit, is it good or bad? Or 20 lakh investment, 5 lakh rupees salary jump, is that good or bad? So, for this, you need to calculate the payback period. So, payback period means that you are taking a 20 lakh loan, and your salary jump is 5 lakh rupees. So what becomes your payback period? In a way, it becomes four years. What is the payback period here? 10 lakh divided by 3, it becomes 3.33. So generally, it is seen that if the payback period is less than four to five years, then it is considered to be a good asset.

Now, this is not the only definition of a good asset; you have to consider your own personal circumstances. Let me give you an example. So, for example, let’s say that I’m 34 years old. Now I’m trying to make this decision that hey, if I invest 20 lakhs in my MBA and I’ll get a salary jump of five lakhs, should I do it? Should I not do it? Okay, now from a finance point of view, it might make sense to do it, but from a personal circumstance point of view, that I have a young son to take care of, I have a family to take care of, I already might be in a good job, so I have to do what I have to do a risk assessment of my decision. So, I hope you get this picture.

Now, let me explain the third key point about taking loans. So, this third key point is called overleveraging because you will get super enticed by looking at the thumbnail of the article that I am able to turn his money into Forex into a sensible asset, let me also try to do it.

 Okay, please understand this point of being overleveraged. What is the meaning of overleveraged? Adani companies, no, I’m just kidding. Let me give you a proper example.

So, the general rule is that if the EMI that you have to pay every month, calculate the EMI of all the loans that you have taken, and if that number comes out to be more than 30 percent of your salary, then in general, it would be said that you are overleveraged.

 So let’s say that you have one lakh rupee cash flow which is coming in the form of salary; you are paying 30k EMI by purchasing an iPhone, by purchasing a house, etc.