How to Maximise Returns on your U/const. Property Investment

Sukanya Kumar - RetailLending.com

With 6 or 7 digit monthly pay-package and loads of perks which generate an envious amount of surplus cash, one has to be inclined towards investing in property market in India today. Every weekend, big flashy full-page advertisements by the developers in the property section of the newspaper attracts the eyes of the family too. Friends call on weekends for a group-visit with family to check out the ones with attractive schemes and if the sales guy at the builder's office is good at his presentation & persuasive enough, you land up buying a property!

Now, you always want the best. Hence, the want of a higher floor, garden-view, an extra bedroom, a patio, planter-box on the deck, big club-house in the complex..... a little better than what you bought earlier and way better than what your colleague just boasted about buying last week, is what you book. Isn't it?

Most probably, you try to explain to yourself after buying it, as to what was the purpose of making that high value purchase. Hence you now start thinking rationally.'My office is far away from this newly acquired home, my child is already settled in the school & wife has her friend's circle. Hence, this new buy wasn't definitely for self-use.' What else, now you have the ANSWER. 'This buy was for an investment.'

Easy answer to suit yourself, isn't it?

Now, let me ask you a few basic questions.

Q1: What other investments do you have & what is an average return you are getting from them?

Q2: Why did you buy an under-construction apartment which will take three years to be ready to occupy for an 'investment'?

Q3: Why did you buy a 4 crore worth home when at the moment you have only about a crore to invest?

I possibly know your answers too:

A1: "I generally invest in Mutual funds through SIP-s, bonds & FD-s. I'm a medium risk-taking personality and if my investments give me an average return of 14-15%, I am happy."

A2: "I just liked their concept. My friend bought it too & I think the builder is good."

A3: "Why not? I can always take a Housing finance. Any bank will give me a loan!"

My dear 'investor', none of your answers justify your buying that property. But now that you have bought it already, I will try to see that you make some profit out of it. I am listing down some DO-s & DON'T-s hereunder:

DO

DO #1. Negotiate a deal with the builder on the floor-rise and premium facing rates. Though these are some of the USP-s the builder has, it really doesn't cost him anything. If you try, you may strike a bargain there. If it doesn't work, try to come 4/5 floors lower to save a few lacs. Trust me, it will matter when you sell/rent out. Nobody will pay you that much extra to be on the 15th floor. The 10th floor guy will sell/rent at the same price you will.

DO #2. Restructure your payment schedule instead of agreeing to the standard one. While booking the builder is interested in the sale & if you are not asking for something which they really can not accommodate, they will. Remember, the later and the smaller amount you pay at the beginning your cost of fund will be lower & you can defer interest-bearing borrowings like loan from banks, relatives, parents etc.

DO #3. Check if CC(Commencement Certificate) has already been received on the particular phase, tower & floor. No bank will give you loan without CC in place but you are liable to pay the builder as per agreed schedule of payment.

DO #4. Check which lenders have already approved the property(your specific block, floor etc.). Double check with your Mortgage Adviser/banker directly. Sometimes, the builder wouldn't know the exact status so well. And without this, your payment plan could really get stuck.

DON'T

DON'T #1. Borrow immediately unless you are opting for an overdraft kind of loan which enables you pay nil interest too.

DON'T #2. Opt for a Pre-EMI(interest payment only) option as the project may get delayed and your cost of acquisition will keep jumping leaps & bounds every month towards the possession. Let me explain how. Say, you have taken a sanction of 2 crores and drawing down a 15 lac tranche' from the bank in March. If you opt for Pre-EMI, then your simple interest will be levied on 15 Lacs till you draw down next. When you draw again in say, May, of 15 Lacs more, your interest payment will now be on 15+15=30 lacs. This means you have drawn (30/200)*100=15% of your loan amount. Like this, once the project is about to be ready and you have already drawn down 95% of the loan, i.e., 1.90 crores and your simple interest(Pre-EMI) is around 1.90 Lacs a month, this isn't going towards principal repayment at all. So, for every month's delay in the project, your acquisition goes up by 2 lacs. If the project gets delayed by 6 months, you shell out 12 Lacs extra!! Imagine, where will your profit come from!

DON'T #3. Delay your payments unnecessarily to the builder. The penal charges once accrued, will make your wallet lighter when you take the possession. No amount of being surprised or defiance will help. Please understand that the sole reason the builder sells it to you at a cheaper price during inception is to get the money from you quickly to avoid external borrowing. So, he will be just, if asking for delay penalty.

DON'T #4. Panic if the prices have really not appreciated as much you expected. If the property price appreciates by 60% in 4 years, i.e., 15% p.a. you should exit. This has actually given you the same return on your MF/Bonds etc. So, this wasn't really a greater investment, but you saved yourself. If it is lesser than that, then you may have to keep biting it for longer & hold on for a couple of more years. In the scenario when the same project is having further phases & new towers still upcoming, you can look at it in two ways-(A) Bad way--'How will I sell when my builder still has so much of stock left?' & (B) Good way--'Since the builder has already pegged his price and that is considered the 'market rate', I can safely sell at a 100-200/- per Sq. ft. cheaper and exit. I don't have to justify the cost.'

So, final formula is simple. If : Y1 or Y2 > X, then your investment was just.

Legends:

Acquisition Cost(X)=Cost of the apartment+Bank interest & processing cost+Time cost(as against the other investments)+Your worry-time

Benefit(Y1)=Tax benefit+Future security+Rental income

Benefit(Y2)=ROI(Return on Investment) via Sale proceed

At the end, my view is, do not make a property purchase decision in a haste. There are multiple concerns to be addressed before you want it to be called an 'Investment'. May be, in my next article I will write about it too.

Till then, happy investing !

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How to get a Loan for Shop/Commercial Space

Sukanya Kumar RetailLending.com

"Can I get a loan if I buy an office space?" heard this many times from borrowers who had taken not less than three home loans, but calls me to enquire on this. Getting a loan against residential property is a piece of cake these days, but raising funds for purchasing a commercial space isn't so. Most importantly, the public know-how on this matter is really poor. 

Hearing this basic question several times, I understood that it is time for me to write about it. Hope it helps.

Commercial purchase can be broad-based into two types- (A) An office space & (B) Retail outlet. And again these two can have subsections like (i) Ready to occupy & (ii) Under-construction.

Lenders are more skeptical on funding in commercial property, and moreso for under-construction ones. Most commercial property purchasers are 'investors' and that may be the reason. Though a few buy for running their own business and if that's the case, a lender feels more comfortable too. A lot of top lenders do not fund commercial properties and a few of those who do, funds only the ready ones and avoid under-construction types. So, before locking yourself on any project, please check with your loan adviser to weigh the funding option.

DIFFERENCES BETWEEN FUNDING A RESIDENTIAL and COMMERCIAL PROPERTY:

Though the financial documents required by the lender to ascertain the loan eligibility of the borrower is same, following are the differentiators-

1. Lesser Loan to Value(LTV) ratio- For residential funding, it ranges between 75-90%, however, the funding percentage is restricted to 55% for commercial purchases. This means more self-contribution by the borrowers.

2. Higher fee- Processing fee for residential purchases are standard fixed fee of 10,000/-. During some schemes, even lesser fee as low as 'Nil' are offered to borrowers. However, for commercial purchase, it is standard 1% of the loan amount and with certain lenders, if they like the profile of the borrower as well as the property, they reduce it to a minimum of 0.5%.

3. Higher ROI- Rate of interest(ROI) is a pivotal factor while borrowing and in commercial type, it is at least 1-2% higher than the residential ones and it can go to even 4-5% if the financial documents have lesser strength and some surrogate product is offered. 'Surrogate' could be like, some other loan track or healthy bank balance etc.

4. Builder category- Lenders are very specific about the builder's profile if the property is under-construction. Whether the commercial property will be ready on time is of utmost importance. Generally a commercial property will take much lesser time to be constructed and the number of occupants in one building will be lesser than that of a residential. For example, there could be one buyer for one complete floor plate, or, say, the number of toilets to be constructed in a commercial setup is much lesser with no bath-area etc, which makes the construction easy and lesser time-consuming. Lenders will look at the previous delivery-schedule maintained by the builder to decide whether to lend in this builder's property or not.

5. Technical evaluation- The building needs to have all proper technical specifications complied with. Be it shafts, lifts, escalators, fire-extinguishing arrangements, emergency exit, double staircase etc. The authorised technical evaluation team of the lender will verify every detail. It isn't so that residential property is not verified well, but commercial properties do have more aspects to inspect.

6. Obtaining all statutory approvals- The builder will have to have all clearances such has approved plans, clearance from different departments like fire, forest etc. to be in place. There should be no demolition risk on the property due to any pending approval. It is the same in case of residential property too, but as mentioned in the previous point, it is stricter and more in numbers in commercial buildings.

7. Loan Tenure- Loan tenure offered in residential property could be as high as 30 years, but in commercial purchase it is mostly restricted to 10 years. This means higher EMI outflow for the borrower again.

8. Capping Exposure- If someone is buying a commercial property worth 10 crores, the lender may decide not to lend more than 3 crores on the transaction, even if he is eligible income-wise and there are no issues on the property front either. This comes from the fear of the loan going bad and the hit the lender will have to take in case of any eventuality like building demolition(fire, earthquake etc.) or demise of the borrower. Since insurance is a matter of solicitation and the borrower in India may choose not to opt for it, the risk remains.

9. Valuation- Purchase cost if inflated by the builder/seller to enable the borrower to take more funding from the lender, it is shot down by the expert evaluation team outsourced by the lender. Almost all of them have multiple experienced valuation-agents who submit report independently and the lender considers lower or the lowest of all, to hedge risk.

10. Residual age of the property- Very old properties do not get funded not only due to the risk related to the age of the building, but also due to not having proper sanction plan or fire-exits or many other things which have been made mandatory in new policy of the lender. So, have a quick check with your adviser. Even if it is a famous commercial building which houses large corporates, it may not get funded by some/all lenders. On another hand, retail spaces are more expensive in terms of rate per square foot than office spaces in same commercial building. Lenders do recognise that fact. So, the same building a office space may be valued at 20,000/- per sft., but retail at 30,000/-. One shouldn't assume that since retail is 30, then so will be the office.

11. Minimum area- Lender will want to fund a minimum area square foot. In retail outlets, there are small spaces called 'vanilla' where generally bank ATM-s etc. are made. These can be even smaller than 100 sq. ft. The lender may refuse to fund any space if it is lesser than 250 sq. ft. or so. Different lenders will have different policies on this matter, so better to check with your loan adviser again.

At the end of it, though acquiring a commercial property works out to be more expensive for you in terms of monthly outflow, since the tenure is less and rate of interest is higher along with more self-contribution to be paid; nonetheless, the 'return' on the investment in commercial property has always been on the higher side. So, if your property is 'eligible' for a funding, then why not?

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10 Secrets on How to get a Perfect Home Loan

Sukanya Kumar - RetailLending.com

There are as many as 50+ lenders in India who will be willing to give you a Home Loan. But whom should you choose? Pretty easy, if you follow the simple path & do not get distracted by what your colleagues say or go by your friends' experiences. Also remember that a credit card service with the same lender could be way different than their mortgage. So, do not tread the easy way of taking it from whosoever arrives first.

Here are the 5 most important things you should ask to know whether it is your match:

1. Do not chase the cheapest rate of interest. Find out a competitive rate and focus on the other aspects of the loan. Cheapest is not the best deal. I keep repeating it in my various comments. Look beyond it.

2. Choose a floating rate of interest over Fixed, even if fixed has an attractive rate offer. There will be twists in fixed products. Many of you miss to note that there's a foreclosure penalty applicable within the fixed term. And moreover the margin changes after the fixed period is over, if the offer rate was for teaser period.

3. Make sure you opt for a lender who offers daily reducing balance and not monthly. It will not make any difference unless you plan a partial repayment. In a monthly reducing balance plan, even if you partially close an amount in between two EMI dates, they consider the repayment only from the next EMI date, thus making you pay interest even on the repaid sum for those days! You will not know, but it will cost you heavy.

4. Do not get biased by your previous experience with another product, or what your friends & colleagues preach, or your relatives feel for. This is finance, a pure mathematical product. No emotions attached. Do your maths & decide. You experience with the lender's credit card or your colleague's irritation with a lender or your uncle's comfort with certain type of lending institutes mean nothing to you. It's your loan.

5. Read all online remarks, which you will anyways do. But 99% of them are otherwise motivated. You will find that those who are badmouthing a lender probably uses dummy ID-s like kingpin, lisahayden, bigboy, greatguns etc. funny ones. You can take their comments as seriously as their identity suggests.

6. Your wealth manager, bank relationship manager, chartered accountant, tax-planner and your finance controller or CFO in office are great. Take their help to get guided to the right mortgage broker. Since you trust them, their reference will matter. But, don't let anyone else handle the transaction, negotiation with lenders etc. unless you find the right mortgage adviser. Mortgage is a specialised product. Ever heard a heart surgeon treating patients for skin rashes? Similarly, a mortgage broker selling mutual fund and insurance will be as good as a real estate broker selling tour-tickets and running an STD shop with photocopy machine! Chose the best in industry.

7. Try opting for a new-age product which saves you money. Standard vanilla home loan are cliche' and won't work for most of my clients who has surplus funds and taking the loan for tax-savings or waiting another property to be sold and pay off the loan. These days, borrowers have various requirement rather than just borrowing for the need of money. Borrowers may not identify it, but a mortgage adviser must & counsel accordingly.

8. Look at the service perspective carefully; you are getting into a long-term relationship. Don't jump on the first lender approaching you or the lowest rate of interest or may be, what your friend's father suggests. You will need a lot of services like- tax certificates, provisional amortisation, list of documents, part closure services, reduction in the tenure/EMI upon partial repayment. There will definitely be requirement of change of address if you are gong to continue the loan for long term. You might shift city or even country. Do not compromise on the aspect of post-sales service.

9. Always ask for a comparison between at least 6 major lenders from your mortgage adviser. And, again..... do not decide on basis of the lowest rate. Look at the base rate, the margin offered, whether any other product is being pushed, how many times the lender has reduced rate in past two years, what is the maximum tenure offered, and how is the eligibility calculated and most importantly whether your property or similar has been funded by this lender earlier.

10. Time taken for processing the loan. This may sound unimportant, but my noting it last, doesn't indicate that at all. When the builder start sending you delay-penalty notices or the seller withdraws from the deal or increases the sale value, trust me, this becomes the top priority on the chart. What will be the point of checking out so many lenders and settle for the one who can only offer, but can not execute?

If you can look beyond cheap interest-rate, you will see an ocean of options. There is a difference between 'price' and 'value'. Identify the need first.

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