Funding your property investment

Saturday, April 24, 2010

With foriegn banks finding its ways into India soil, finding capital for your investment is geting much easier now adays when compared to decade back. Whether you are looking to buy TV or vehicle or property there are plenty of option, if you can show some your fund flow for the last six month.

By Fund flow, I mean, monthly salary or business returns. More than salary or business return the financiers might also look for monthly average excess in your bank account, so that they can judge whether you would be in position to service his loans.

Earlier, people made a modest living, would never go for a loan for investing in vehicle or even for apartment. This was the case about 15 years back. Bank used to provide loans for housing only upto 15%, the rest 85% should have come from home purchaser. The general thought was property like home was almost a dead investment. Real estate was never a priority sector lending for nationalized bank, it was small industry & agriculture which were the priority sector lending for the bank. However, it looks to me that both the sectors have been overlooked these days and home loans have taken higher precedance.

When financing the small industry, banks used to look for the Debt (loan amount) : Equity (owners capital) ratio, normally they considered this ratio to be around 3:1, which mean if investment is 30 lakhs, owner should have brought in 10 lakhs. Going by the same thought, this can be applied for purchasing a house as well. For example for a 30 lakhs property, it better 10 lakhs (approx 30%) is brought in as your contribution. The more your contribution, the safer you feel and more the debt content could mean inviting trouble.

Finally, my two cents on this topic particularly on property transaction, are to look at the trend in last 15 years are so, year on year basis, if the increase has been 10 to 15% then its a safe bet to invest, had the rise been steep like 100 or 200% there would be some correction. The correction could even be the pricing stabilizing without raising further, meaning whether you purchase now or 4 to 5 years down the line, there may not be much variation.

Further one has to keep in mind, that unlike west, India does not guarantee social security for its citizen during sunset years and hence better do some home work before taking debt route for financing your property investment.

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