A reader messaged us about his friend’s confusion on should he buy flat with money got from selling land.
Question: Below is a query on behalf of my friend, 37, Male. He is married and has a son of 7 years old. He is earning about 25k per month and sometimes it is difficult for him to meet his ends. He is currently staying in Pune (on the outskirts of Pune) in 1-bhk on rental basis where the rent is 6.5k.His father passed away last year. Currently he has around 29L with him which he received after selling his father’s home (which was at his native place).
Currently he has no savings of his own. He wants to buy a flat in Pune. 1-bhk flat in good area where his kid’s school is nearby and his wife can also contribute financially by taking some tuition/classes. He is in a dilemma on what needs to be done further.
Option 1: Purchase a flat 1-bhk in good area. Flat price approx. 37 or 38 Lakhs. Take home loan of about 9 or 10 lakhs. In this good area, there is scope for his wife to take those classes and contribute. Also, it will be good for the kid since school will be near. But due to EMI, he won’t be able to save much.
Option 2: Purchase a flat 1-bhk which is far from good area. Maybe outskirts of Pune city where the flat rate is less. Try to buy a 1-bhk within 29 Lakhs so that there is no loan burden. In this far-away area where flat is purchased, very less scope for his wife to contribute. There will be travel for the kid as well. But he can think of some savings through SIP mode.
Option 3: Do not purchase a flat. Hence no loan. Continue to stay in a rental apartment. Invest 29L and withdraw the money on regular basis as income for paying rent and groceries and some other expenses. Also do some aggressive investments from his salary to secure future.
What should he do ideally? Best possible option? Does it makes sense to purchase a flat? Please guide.
buy flat with money got from selling land
Answer: There are many answers. I will share all of them here and you can choose accordingly.
Option 1: Stay in rented apartment in good locality where his kid’s school is nearby and wife can support by taking classes. Invest the capital 50% in Nifty index for future growth and 50% in RBI floating rate bonds which will give him additional income to pay rental difference
Option 2: 1. Ideally he should look for a property within 25 lakhs for living.
2. Not to think about loan as of now
3. If the property is not available within the above budget then wait till he can afford a higher value property as and when his income increases
Option 3: 1. Out of 29L keep 20L in FD. This will give you Rs. 8000+ monthly interest. Use this amount to rent out a 1BHK in a better society and close to school. This way you can save on school transport as well as wife can contribute financially by taking tuitions.
2. Put remaining 9L in nifty index fund for long term returns. Keep adding from your monthly savings.
3. With rise in income you can think of purchasing a 1BHK later with the 20L FD as down-payment and rest as loan. But only when your income affords it and emi is kept below 30% so that other savings are not affected.
In RBI floating rate bonds only 14 lakhs required to generate about 1 lakh interest per annum. With RBI signaling rate hike, rate may increase further in future. Only con is the lock-in of 7 years. Since this seems to be the only corpus liquidity too is important incase he wants to make down-payment in 3-4 years or faced with emergency where he can partly withdraw from the FD. Also monthly cash flow in this case may be helpful against the 6 monthly from bonds as most of the salary is utilized in living expenses.
Option 4: 1. Emergency fund 25000 x 12 = 300000 in bank fd
2. age 37 so for 20 yrs expense = 60 lakhs – 29 lakhs is 31 lakh minimum term insurance
3. family floater policy of 5 lakh min If he invests 20 lakh in RBI floating rate bonds he will get around 143000 p.a. to pay term insurance, health insurance rental difference in good locality. The exact amount can be calculated by calculating premium of health and term insurance.
Invest in Nifty index for growth
Remaining can be invested in Nifty index for growth. Nifty index fund is a mutual fund which invests in top 50 companies by mkt. cap. (Nifty index) and hence not affected by the fund managers risk. Also it has the lowest expense ratio among the mutual funds as it is passive fund as against the actively managed funds by fund manager. Any index mutual fund from the big houses must be fine – UTI, HDFC, ICICI. Just invest in direct growth plan Also it is strictly for long term goals like retirement/child education as it is subject to market variations. Underlying assumption is over long periods like 10-15 years the volatility will iron out and you may get better returns.
Option 5: 1. Stay on rent at current Place.
2.Put Money in FD, He will get around 12-14k Month.
3.Build Funds through FD Earning till 5 years He will earn minimum 7lakh after 5 years. Ask him to upgrade and try to reach minimum 50-60k salary in next 5 years. Rent till he saves good money.
Option 6: 29 lacs should not be touched at all invest it n forget it let it grow that will help him in his old age n currently he should manage with salary n he is unable to make ends meet with salary then need to look at ways how income can be improved.
Option 7: 1. Get a room on rent in city
2. Invest the 29L
3. School will be near for your kid
4. Wife may take tuitions and contribute
5. Earn, spend and save money collectively.
Option 8: As he has family, buying 1 bhk not be a permanent solution for him. My recommendation is to invest the 29 lakhs safely and stay in rented apartment. The returns from the investment can be partially used for emergency funds and remaining for systematic investment. Anyway he is paying 6.5K as rent, go to a good area for the better education of his kid, stay in a 1BHK rented house. Good education for his kid is the best investment he can do.
As he don’t have any loans, he can allocate some more amount for rent. If his wife also contributes, then the family budget will be smooth. Later once they reach some stability, they can plan for a permanent accommodation. I would recommend minimum 2 BHK as in long term 1 BHK will be difficult. Buying flat is not an investment. Considering the current construction quality of majority of the builders, the price will come down for used apartments.