Back during fresher days, I had just started working and had no idea how a Home Loan can be good. I had always wanted to build my own house and we all know how huge the investment is. Here is a simple example of how one of my Marwadi friend points out the benefit of a home loan or any kind of loan for that matter.
This is of course a figment of my imagination, but still an excellent way to show you the benefits of taking a home loan.
The story of four friends
Say in the year 2020, you need 60 lakhs to build a house. Four close friends map their savings and earnings towards it. They agree to a challenge to achieve this goal.
All hold similar jobs making about Rs.60000 per month. And with all the calculations made they decide to meet after 15 years and see how well they have progressed.
Fast forward 15 years
Now after 15 years the living it big friend made his entrance with one of the most expensive cars dressed in a tailored fit dress, he certainly had the most expensive of things on him. He certainly was living big. Then entered the lazy friend who was completely the opposite of living it big friend. Then the smart friend walks in with just the right amount of flair. Finally the Marwadi friend walks in wearing shorts, not seeming to care what the world thinks of him.
The party finally ended and they all were really happy to see each other after 15 long years. As they all settled they finally spoke about where each of them were with getting the house.
The living it big friend said “What house? I tried but I just realized that I had to live my life at that moment and nothing mattered more than that”. He finally said he had little or no saving and that he won’t be able to survive if he stopped working.
This made the lazy friend a little satisfied. He said he had saved 68 lakhs, that is 8 lakhs more than what he needed back then with the help of the 4% interest that he got from the bank he had stashed his money in. He was all smiles until the smart friend finally told him that to build the same house today he needs to have at least 95 lakhs.
Smart friend finally said he had saved more than 95 lakhs and will be starting his construction from tomorrow. He said he made a few investments in stocks and gold and that helped him beat inflation and now finally he could live in that dream house of his but will require him to continue working.
Now the Marwadi friend says, “Don’t worry guys I managed to buy those 4 houses and they are all ready to occupy. You can move in right away. Just pay me rent so that I can buy a few more!”
How Home Loan can be good
So what the Marwadi friend did was, as soon as they decided they all needed a house, he went straight to the bank and got a loan and bought that house. And he rented in out. When you rent out a house you get a deposit from the tenant and the rent is usually about 0.3 to 0.5% of total investment. So he had gotten a 5 lakh deposit and made another 60000 every month. Similar to this he decided to buy 3 more houses and covering the mortgages with rents and his earnings. In 15 years he has cleared the EMIs. Now he has 4 houses which gets him that extra income to live care free.
The living it big friend lived for the moment, never seeing the future. The lazy friend didn’t bother to research and find the best ways to save and grow wealth. What the smart friend didn’t want to do was have loans under his name. Whereas, the Marwadi friend had the courage to leverage bank loans to fund his real estate dreams and bought not 1, but 4 houses in the same 15 year period. This allowed him to earn steady passive income via rent and in the future build assets. The value of the homes appreciate and if he were considering of selling home, he would make a handsome profit.
I am not saying take loans. But if you know when and what to invest in and if you are savvy of the upside and downside on your investments, taking out a loan might be the perfect leverage (when other means of funds are missing). Just make sure that when you take that extra loan, you are making it work for you.
All said, the only way to get rich and stay rich would be to have your money work for you and not the other way around.