How Mr Ram’s Dream Home became a reality

How Mr Ram’s Dream Home became a reality

All of us have some or the other aspirations in life beginning from good education, a well-paid job, a successful career, a beautiful house to live in with best amenities, a car, travel abroad for leisure and a blissful retired life after having achieved all.

But amid all these aspirations, our experience shows that most individuals often put buying a dream home at priority, so that they can live in with their near and dear ones. But very often, the way to own it prudently is not known to many. You see, all of us do dream for a big house but rarely an action is taken to make it a reality. Remember, dreams do turn into a reality for those who really want to achieve it and strive hard for it. Insure to secure your home from burglary and natural calamities)

We recognize that elevated property prices are making this aspiration of yours a distant dream, but prudent planning is the way to make your dream home a reality.

Let us explain you this with the help of a case study of one of my client who wanted to plan for his dream home but didn't know how to achieve it because of the limited surplus he had.

Personal Details
Name	Ram (Name changed to protect privacy)
Age	40 years
Marital Status	Married
Kids	2 Kids
City	Mumbai
Income (post tax)
Salary	Rs 1,00,000 per month
Bonus	Rs 2,00,000 per annum
Expenses (per month)
Household	Rs 20,000
Lifestyle	Rs 10,000
Medical	Rs 3,000
Travel	Rs 7,000
Kids	Rs 15,000
Rent	Rs 25,000
Total	Rs 80,000

 

Personal Details

Mr. Ram a 40 year old married individual was staying with his wife and 2 kids in Mumbai. Since most of his employment opportunities were available in Mumbai only, he wanted to settle down here for the rest of his life. His salary income was Rs 1 lakh per month and he was also getting an annual bonus of Rs 2 lakh. Most of his monthly income was spent on his regular expenses which included a hefty Rental Expense of Rs 25,000 per month, and at the end of the month he was able to save just Rs 20,000 (Rs 1,00,000 Income - Rs 80,000 Expenses) for his future financial goals

He had the following assets as depicted in the table below.

Assets
S.No.	Type of Assets	Amount (Rs.)
1	Equity Mutual Funds	1,500,000
2	Equity Shares	550,000
3	Debt Mutual Funds	700,000
4	EPF	650,000
5	PPF	800,000
6	FD	300,000
7	Car	475,000
8	Residential Flat (Delhi)	6,500,000
9	Physical Gold	900,000
10	Cash in Bank	450,000
Total		12,825,000

Assets...

So, you can see that Mr. Ram had total assets worth Rs 1.28 crore, of which Residential Flat in Delhi comprises 50% of his total assets. His residential flat in Delhi was vacant and since it was inherited by him from his father he did not want to sell it. He had some investments in Equity via Equity Mutual Funds and Equity Shares which he had accumulated over the years. His investment in debt comprised of Debt Mutual Funds, EPF, PPF and FD. EPF was started when he started earning at the age of 25 years and PPF was started 10 years ago. He also had a car which he used for commuting and some investment in physical gold, which were mostly gold ornaments of his wife. He was also maintaining some amount in cash for his contingency purpose.

He did not have any liabilities.

And here was Ram's Aspiration!

He wanted to buy his own flat in Mumbai worth Rs 1 crore but didn't knew how to fund it as he had surplus of just Rs 20,000 per month.

PersonalFN recommended him the following:

Self-funding vs. Home Loan: Buy a flat in Mumbai of the aforesaid value i.e. worth Rs 1 crore, with Rs 25 lakh self-funding and a home loan of Rs 75 lakh at 10% per annum rate of interest, with a loan tenure of 20 years; whereby the Equated Monthly Installment (EMI) amounts to Rs 72,377 /- 

A) The self-funding of Rs 25 lakhs was funded from following sources:

1.       View on Equity Mutual Funds: Equity Mutual Funds worth Rs 5 lakh were asked to redeem as these were either non-performing funds or did not suit his risk appetite. Redemption proceeds to be utilized for funding the house purchase.

2.       View on Equity Shares: You see, he had invested Rs 10 lakhs in Equity Shares on his friend's recommendation, but the current value of these was just Rs 5.50 lakh. Since he did not have time to track these shares, PersonalFN recommended him to sell these, to fund his house purchase. We also recommended him not to invest in equity without any researched based recommendation.

3.       View on Debt Mutual Funds: Long term income funds worth Rs 2.5 lakh were asked to redeem as these are interest rate sensitive funds and did not suit his risk appetite. Redemption proceeds to be utilized for funding the house purchase.

4.       Withdrawal from EPF: He was working for last 15 years and had accumulated Rs 6,50,000 in EPF, so he was eligible to withdraw Rs 4 lakh from this account to buy a new house. Explore to know when and for what purpose you can withdrawal from your EPF account.

5.       Withdrawal from PPF: He had opened a PPF account 10 years ago and was eligible to withdraw Rs 4 lakh from this account to buy a new house. Explore to understand PPF and withdrawal limits. 

6.       Fixed Deposit: Existing fixed deposit worth Rs 3 lakh were asked to be utilized to buy a new house.

7.       Bonus: He was eligible to get his annual bonus of at least Rs 2 lakh, in next 2 months; so he was asked to keep it to buy a new house.

Self-funding (Rs)
Equity MF	500,000
Equity Shares	550,000
Debt MF	250,000
EPF	400,000
PPF	300,000
FD	300,000
Bonus	200,000
Total	2,500,000

 

B) EMI of Rs 72,377 was funded from following sources:

1.       Existing Rent: Buying a new house saved him Rs 25,000, which he was currently paying for a rented house. This amount was asked to be utilized for partially paying EMI on his new home loan.

2.       Residential Flat (Delhi): Residential flat in Delhi was lying vacant, so we asked him to put it on rent. He did that and it fetched him Rs 15,000 per month as rental income.

3.       Second Source of Income: His wife had left job few years back but was ready to work in case of requirement. So we asked her to start working for next few years till the time Mr. Ram salary was sufficient to fund EMI. This second source of income contributed Rs 22,377 per month.

4.       Surplus: He had surplus of Rs 20,000 per month but all of it could not be utilized for payment of EMI as he had to invest for other financial goals as well. So we advised him to divert Rs 10,000 from the surplus for the payment of EMI.

EMI funding (Rs)
Rent	25,000
Rent from Residential Flat in Delhi	15,000
Wife	22,377
Surplus	10,000
Total	72,377

So the dream home which looked impossible for Mr. Ram to achieve with a surplus of just Rs 20,000 became reality with prudently planning and some quality advice given to him.

Mr. Ram will struggle for few years as he will have very limited surplus, but the next few years will make sure that he has his own house in Mumbai. He also have an added benefit as EMI will not increase except in case of increase in interest rate on home loan; whereas his rent was growing at 10% every year.

Learning's from this case study and 5 Points to Remember:

1.       If you buy your own house then you will save rental expense which will be available to fund your EMI.

2.       Rental expense increases every year while EMI increase only in case of increase in interest rate which will always be less than increase in growth rate in expense.

3.       If you have a vacant house, then consider giving it on rent for additional source of income.

4.       If possible second source of income from spouse can help you fund for your goals.

5.       Do not allocate your entire surplus for paying EMI as you have to plan for other financial goals as well.

If you also want to buy your dream house but don't know how to fund it, then do not hesitate. I would be happy to plan your finances prudently to help you achieve your goal of buying a dream home.

You see, this was one of the cases in Financial Planning Real Life Case studies to be published. More to come.

Happy planning and Investing