“It is the absence of facts that frightens people: the gap you open, into which they pour their fears, fantasies, desires”
– Hilary Mantel, Author of Prize-winning book Wolf Hall
In my previous newsletter, we saw the luxury real estate and the typical price tag for them. We may have dismissed them as something that is excessive or unaffordable or not worth the price. Due to the inventory surge the real estate developers have come up with some creative ways that will make the investment attractive. In this newsletter, we can review some of the options typically available for the NRIs that could be leveraged for the investment.
Here are some funding options and we can review them in detail below:
Home equity or equity plus loans
Mortgage loans from Indian banks
Combination of the above
NRIs typically save up the money to purchase assets. It is a prudent way to accomplish the goals. This is best for the down payment option. My recommendation is that set aside 10% of your income into a savings account in a bank which is different from salary account bank. Setup a scheduled transfer from the salary account to fund this new account. You will be surprised to see the money grow without the need to spend. Once you reach three to six months of emergency funds, the rest can be used to fund the investments. The emergency account is a must irrespective of your goals.
It is essential for all NRIs to take advantage of the 401k plans offered by the employers. It is almost 3% of free money that is matched by your employer and you don’t want to miss it. Then use the funds to invest in an index funds to grow reasonably without any hiccups. In addition, 401k offers (for most employer plans) loan options where you can get a loan of up to 50% or $50,000 without any questions at reasonable interest rates. Again this can be utilized either for initial payment or installment payments.
Home Equity or Equity plus loans
Since most of the NRIs own the residences, it could be leveraged to fund the purchase of property in India. With low interest rates the borrowing can be easily paid off. Our recommendation is that Equity plus loans are better since you can draw the money based on the installment payment to the real estate purchase from the builders. The interest rates are low when compared to the mortgage rates in India.
Stocks are the quintessential liquid assets but they come with lot of risk. The market meltdown of 2008 as well as the September/October fluctuations will make you lose sleep. These investments could be converted to the real estate where you get the returns as well as the appreciation. With the revised regulations the money can be repatriated back to the US. Again if you have the conviction that the stock market will give better returns than real estate you may have to live with the uncertainties as well.
One of the best ways to earn passive income that could easily fund the real estate investment. The rental income serve two purposes, one to support you during the retirement as well as providing a steady stream of income till you retire to save for purchasing additional properties. If you do not have rental income purchase a commercial or residential property.
Banks or credit cards do provide personal loans. Our recommendation is to stay away from them since they come with higher interest rates and you do not want to have that kind of debt.
Mortgage from Indian banks
Due to the recent changes, many banks in India have come forward to give loans to the NRIs. As a matter of fact the developers themselves have opened up separate divisions that assist the NRIs to secure the loans from Indian banks. The interest rates are steep 9% to 10%. However it gives the benefit of paying the developer on time and then pay off the loan at the earliest from saved funds abroad. Our recommendation is to consider this option as a fall back or if you have some money coming in from India that could be easily used to pay off these loans. In addition, tax benefit can be claimed on the interest.
As we have seen, there are lot of options for funding your real estate investment. The time is ripe since we could get really attractive offers from the developers. The above options are indicative of typical NRI situation and is generalized. Your situation could be quite different and we can provide assistance if required to review and provide no obligation recommendations.
Also, we are getting interest from subscribers to create a real estate investment fund with multiple investors to generate rental income. Please drop a note if interested.