Today I’m going to tell you the story of adaptation of rich dad and poor dad philosophy implemented in the Indian real estate space. Many would have attempted. This is just a narration of my own experience.
Before we begin just a brief recap of what rich dad and poor dad philosophy is. One of the best sellers in the world, rich dad, poor dad advocates for having a passive income along with your regular active income.
My journey for the quest of passive income started somewhere in the year 2000.
I entered several property transactions seeking capital gains and rental income. I was already an equity market investor at that time and used to trade futures and options on popular Indian exchanges. However, my experience with equity market and futures and options was that markets were too volatile and on a meager salary that I used to run that time the losses and profits were both huge. While the profits were welcome, the losses used to be problematic. There were times when my monthly salary did not suffice to take care of the losses. And I had to borrow money to make good of the losses and to meet the marked to market margins levied in the options and futures segment.
While I was happy trading, I thought that this strategy is not going to work in the long term because the markets were too volatile, and losses had to be funded. There was no proper trading discipline that was put in place by me.
I also wanted an investment vehicle where once you put in money it is just moved away from your sight. This delivered the first benefit to me. No surplus money meant no trading losses and no bad debts to friends. And no failed business ideas too.
Property seem to be a good proposition. Whatever money you paid in the form of equated monthly installments (EMIs) would go to the bank and would be away from your eyes and inaccessible to you. The principal payments that you do towards payment of your loan is money coming back to your own account. The interest payments are the real costs. So if you manage to earn at a rate above the interest rate and interest payments on the borrowings to purchase the property, you are good.
The second big advantage that property markets deliver is leverage.
When you buy a Rs 50 Lac property and make a down payment of Rs 5 Lakhs which is 10% of the purchase value and property prices move up from 50 Lakhs to 60 Lakhs you have made Rs 10 Lakhs on the value of the property but the return on your original investment has grown 100% because for the profit of this 10 Lakhs you have actually invested only Rs 5 Lakhs from your pocket to begin with.
The third benefit from property is obviously capital appreciation which we all look for. However, for me the most important benefit according to Rich Dad Poor Dad principles was the rental income which is annuity in nature. The good thing about this income is that it is inflation adjusted which means that when general costs go up your rentals will also go up and when costs come down your rentals also come down.
Another important feature of this investment is that it is perpetual in nature. This essentially means that if you invest in fixed income deposits or bonds it will ultimately be redeemed back to you when the term is over and if you want to reinvest perhaps you will end up reinvesting at a lower rate of interest in the current falling interest rate scenarios globally including in India. It is this perpetual annuity income that drew me into this market.
Although I love the Low-cost equity investment model, I ended up investing significant amount of my personal net worth into property.
I am giving below my key learnings for anyone who wants to invest in property market after reading Rich Dad and Poor Dad and wants to implement its philosophy of passive income in the Indian property market.
I will also talk about some important learnings and do’s and don’ts for the Indian property space.
Indian Property Market is Not US Property Market
The first thing that to keep in mind is that Indian property market is not US property market. The kind of ease with which the author buy sells and flips properties in the US is something that cannot happen in India.
This is because of three reasons –
- The rental yield in Indian property market is far lesser than what you earn in the US market. This is the most important risk and reason why Rich Dad Poor Dad principles cannot be easily implemented in the Indian property space. A general rule of thumb that I have noticed in India is that the rental income is 1/3 in thousands of the capital value in lakhs. This I have seen is true for all cities and all areas. For example, if you spend Rs 1 Crore in residential accommodation you will get rupees 33,000 as rent. The similar ratio is about half for commercial property which means if you spend rupees one crore in buying a commercial property, you could get rupees 50,000 as rent. This also means that if you are buying a property where the rental income is not matching this formula, perhaps the rental yield is low or you are paying extra for buying the property. I have also seen rentals decline from this formula in major cities like Mumbai and Delhi simply because people are willing to overpay for properties. In the United States this yield is much higher.
- The interest rate in Indian home loan market is much higher than in United States. This means that if you hold a property for five years you end up paying considerable amount of interest on your home loan as compared to your peers in the United States.
- The price Discovery in Indian property market is not proper and scientific. And so is the information dissemination process. In the United States you could publicly verify all the transactions that happened in a neighborhood and the prices at which they happened. In India there is a standard ready reckoner that the government publishes from where you can access rates but there is no information about the number of transactions and transaction specific prices. You already know that are one price fits all doesn’t fit in property market where two properties could differ up to 20-30% in prices within the same locality and the same neighborhood depending on which site is facing which floor it is and the condition of the property etc.
There are some advantages in the Indian property market as compared to the US property market as well. In the United States the brokerage rate is around 5 to 6% on property transactions which is extremely high. In India, I have paid about 1 to 2% Commission. My main broker charged me 2% for most of my transactions but I happily paid because he brought to me some exceptionally good deals.
My Journey of Property Investments
My journey of property investment started in the year 2000 when the property market was almost at all time low in the Indian property space. My first investment was in a property in Kandivali in Mumbai at a now unbelievable price of Rs 1980 square feet. A small-size 2 BHK apartment purchased for Rupees 14 Lakhs. But like with everyone even 14 lakhs were difficult at that point of time because it was my first property. I had to take Rs 12 Lac loan to buy this property. Builders in India are known for their unscrupulous methods and I too become a victim in this first transaction. When I went to collect the keys on the promised day of delivery the builder asked for an additional Rs 1.5 Lakhs for parking. When I told him, I do not have a car he pointed at some clause in the agreement that mentioned parking was compulsory. When I told him I really had no money to pay for parking, one of his employees took me to the corner of the room and told me that taking parking was compulsory and not car parking so I ended up paying ₹6000 for a bike parking that complied the terms of the agreement and I got the keys. I remember clearly after making the purchase I was not even left with enough money to buy curtains and friends for this flat. For one full month we lived without curtains and fans which was fixed with the next salary.
Indian property market at that point of time what’s price very low and entry at this point was really very beneficial. This is one advantage that I had at that time which people may not have currently add I feel this is the single most important thing that people should look for low cost of property according to me is the 1st and most significant point in this entire investment philosophy. After purchasing this property and moving into it EMIs started pinching. It forced me to change my job and I took up a job with higher income. This new job also took me to France where I could save some money.
While I was in France one of my cousins called up and told me about a small but fantastic investment opportunity in a flat in Pune. We had seen this flat earlier but that time there was no seller and we had no money that time as well. This flat was available for sale for rupees 11 Lac. I spoke to the buyer who appeared to be a very sensible person and was selling this flat because he had bought a bigger one and wanted to move in there. He agreed to sell it to me for rupees 10 Lakhs. I didn’t even see the place and the specific flat. I borrowed some money from my friends in France, topped it up with my own saving and remitted the money (2 Lakhs) to this seller, with a commitment that I will complete the transaction once I’m back to India. Having received 20% of the amount, he was confident I would complete the deal.
I returned to India in about six months’ time and completed the transaction by taking up rupees eight lakh loan. Now I had two properties. My family lived in one in Mumbai and the other one at Pune I gave on rent which at that time was around rupees 3000. I paid EMIs of Rs 15,000 in my Mumbai flat and Rs 8000 in my Pune flat. After some time, I resigned from this job and took up a job in a leading Indian multinational technology company in Bangalore and shifted to Bangalore. When I shifted to Bangalore, I discovered that there was a huge property demand there. This was year 2003 and prices were still not very high, but the frenzy had already begun. This was also the time when a lot of technology professionals were moving from their own respective cities to Bangalore. Because of this unprecedented migration of skilled technology professionals to Bangalore the rental markets there was already overheated. Even basic flats with basic amenities like lift were overpriced. Being from Mumbai, I also found it amusing that people classified elevators as an amenity. I quickly came to the conclusion that buying a property here would be much better than actually renting out. My same cousin who had given me lead of Pune flat in the meantime also landed a job in Bangalore and we started staying together. We started doing our own legwork and zeroed down on two good flats in the same building in a highly sought-after place called Koramangala in Bangalore. The price of each of these flats was about rupees 35 lacs. By this time, I had some more of saving left to make down payment for the flat. Banks at that time were also very generous to technology professionals and were offering 100% of the loan amount without asking for any down payment. We took a loan individually and bought 2 flats. One for me and one for my cousin. We gave out one flat on rent and started living in the other one. Financially it made a lot of sense. The rental yield in Koramangala was exceptionally good. And the capital value of the properties kept appreciating too.
So now I had three properties, of which two were self-occupied and the third was on rent. There was one problem though. Most of my salary was already going in EMIs. I was hardly left with any surplus income. These were the early days. Little did I know that I would have to live with this problem for a very long time. But one thing that was continuously working in my favor what’s that the prices of these properties were continuously going up.
Our search for good properties in Bangalore landed us with another property which I bought by putting in a down payment of rupees 5 Lakhs and sold it after an appreciation of 5 Lakhs earning me 100% return. This was on the beginning of Sarjapur Road. What helped me decide was the beautiful landscaping with multiple pools and water bodies the builder was doing in an area that otherwise didn’t have this kind of landscaping. I intuitively felt that people will later pay premium to buy apartments in this society than all others going at the same rate then. The deal was done at Rupees 27 Lakhs and I sold it a year later for Rs Rupees 32 Lakhs which was five lakh of profit on five lakh of investment. I didn’t take loan on this property simply because I had purchased it for trading (in property market, it is called flipping) and the next payment was anyways due after one and a half years and I was confident of selling it off before that.
After spending three years in Bangalore, I took up a job in Navi Mumbai and started living in a rented flat in Navi Mumbai. It was strange that I had three flats by then but continued to live in a rented property, to live close to my workplace.
My hunger for property was so high that most of the weekends I used to travel down from Navi Mumbai to Pune and continuously meet builders and property resellers looking for deals. I saw hundreds of properties and wanted to buy few of them but with my limited salary and surplus, I could only commit to very few. I found a brilliant agent who clearly told me that his fees were 2% non-negotiable but would happily do all the legwork for me. A couple of times he called me to show some properties in Pune. I travelled all the way from Mumbai to see them only to find out that they do not fit into my investment criteria.
By this time, I had developed an investment criterion. This criterion is interesting, and I want to share with readers. Every EMI paid to bank, has two components – principal component and the interest component. I was happy to buy a property if the rental income from that property was equal to or more than the interest paid to banks on loan that I had to take to buy the property. This with minimal down payment from my side. Think of it because in holding a property, it is the interest that you pay to the bank is the running cost. And if this cost is being covered in the rents, I’m happy to buy and hold the property. This is because it also promises capital appreciation so while cost of holding the property is passed on to the tenant, as the owner of the property I end up enjoying capital appreciation on it. Many a times, the rent will not be enough to cover your interest costs, at least in the first one or two years when the area is developing. But once things settle down, this formula starts working.
Purists will argue that there are other costs as well for example brokerage maintenance and continuous upkeep of the property but as long as the capital appreciation is good I didn’t mind holding these properties and putting up with these additional costs from my own pocket.. My broker clearly understood my investment formula which I shared to him in Excel and used to call me whenever a property fit into this investment criteria. Over the next six months to a year we saw a lot of properties.
I would also like to share with readers that only prime properties will fit into this investment criteria. You can try it out yourself and see. Properties in the outskirts of the city will not fit into this investment criteria area and if a property is not fitting into the investment criteria it simply means that either it is overpriced or earning less rent both of which is actually not conducive for the investor and the investor must give it a pass.
Of the several properties that we saw, we zeroed down on three or four that we will talk about.
There was an old, poorly maintained but large property on Boat Club road in Pune which looked very attractive from a location point of view. But the seller said she just accepted token advance from someone else for sale just 30 minutes ago. There was another 3 BHK about 1300 square feet flat sold by two Parsi brothers who had inherited this flat. The flat looked a lot larger in size. The price quoted was rupees 25 lakhs. This was in Koregaon park. In my zeal to bargain, I bargained so hard that one of the brothers decided to get the flat formally measured. He called in the architect and got the flat measured and to our surprise we found out that the flat was 200 square feet extra than what was quoted in the document. It seems there was a practice earlier in Pune where builders used to under quote the size of the property in documents to save on taxes and fees. Both the brothers then decided to not sell the property. It was a big loss for me. I also learned a big lesson. If the property is appealing just go for it don’t bargain too hard and make it difficult for the seller. Leave something for the seller as well. Of all the other properties that I saw there was 1 three BHK flat in Kalyani Nagar in Pune which I liked. It was 1340 square feet flat on 1st floor with a large balcony. The owner quoted rupees 25 lakhs when we had paid a visit to see the flat but later decided to go back on the transaction because she came to know that she had to pay rupees one lakh on income tax in the capital gain they would make. These rupees one lakh of additional cost was not something she was willing to digest. I sensed that this tax obligation was a deal big breaker for them. Kalyani Nagar was a very good upcoming area at that time and I desperately wanted to buy this flat. I offered to pay her one lakh from my own pocket so that she could meet her tax obligation and I could buy the flat without any additional leg work. She put one more condition that she will continue to stay in the same flat as tenant for the next one year and would pay rupees 10,000 as rent. A lot of people don’t agree to this kind of arrangement because they fear that even after selling the flat the original owners will not move out and there will be a litigation later on. However I was very clear in my mind that since the entire flat was on loan it was the bank who was the owner and not me and banks have their own mechanism to get the properties vacated if you stop being their EMIs. I agreed to this condition and purchase the flat with 100% loan money and at incredibly good rate of interest of 7.25% (fixed rate) for 20 years. Their family continued to stay for the next three years without any problems and they vacated and shifted back to their village when their own property got ready. The rate of interests too subsequently crossed 10% but this was at fixed rate, so I continued paying 7.25% on this one. How I managed to reduce the rates on my other loans is something that I can document in another article.
By that time there were several new properties also coming up in Koregaon Park & Kalani Nagar area. I zeroed down on another property this time a new one by one of the most reputed builders in Pune. It was a 3 BHK property in Koregaon Park with the builder price tag of Rs 25 lakhs. My problem really was that I did not even have one lakh in my pocket. EMIs were a constant drain on my pocket. However, capital gains were working in my favour. There was also huge tax advantage that I can discuss in another article.
I asked my broker to arrange for a meeting with the builder of this property. I only put one condition that I will meet the builder directly and not with any of his junior employees. The meeting was held in his office in Clover center in camp area in Pune. When I met the builder, I told him I liked his building and flat and that I was keen to buy but I had a problem. He asked me what? I said I had no money. He had a big laugh. He said – I have met thousands of buyers over the 20 years that I’m in business but I never came across somebody like you who fixes up an appointment and tells me I want to buy a property of yours but I have no money to buy. He said let me try and solve your problem. He asked me if I had one Lakh in my bank account. I said no I didn’t. If I had one Lakh in my account, I wouldn’t have fixed up this meeting at all and would have managed to complete the transaction on my own. It was really the case that I didn’t have any money with me and yet I wanted to complete the transaction. The builder asked me if I had rupees 25,000 I said I don’t but I will manage by taking loan from any of my friends and paying him back from my next salary. He said OK then we can do one thing. You give me a check of rupees one lakh which I will not bank add another check of rupees 25,000 which I will bank. So make sure you have Rs 25,000 in your account a week from now. He said this 1.25 lakhs he will mention as down payment in the loan document and property agreement and the balance he will help me raise us loan in my name. This will eventually leave him with a deficit of rupees one lakh for the check that he didn’t bank, and he told me I was free to pay this one lakhs whenever I wanted in the next three years. The transaction happened. This was my first property in Koregaon Park. I loved this area. Eventually, I would end up owning 5 properties in this area.
Sometime later, my broker brought another beautiful property in Koregaon park for a similar price for which I made a minimal down payment and took a loan. This was my fifth property – three in Pune, one in Mumbai and one in Bangalore.
My whole balance sheet had properties on the asset side and loans owns on the liability side with hardly any other asset or cash. The only thing that was working in my favor relentlessly what’s that these properties continued to yield rents and appreciate in value and so when banks asked for documents to approve the next loan they were quite happy to see the kind of serial investments that I had made which continued to earn me rents. The rents were also in fact going up as time passed by. I was doing very well in my job, so salaries also kept on going up and so were the rentals giving me enough space to buy more properties. I had also flipped a couple of commercial properties by this time earning small amount of profits in appreciation.
Just to put things in context on how much I loved properties and generating assets I want to inform readers that till this time I did not even own a car. My investment philosophy makes me believe that a car is actually not an asset but a liability. I know readers will think I am crazy to own five apartments but no car. I was actually in no urgency to buy one because I was unmarried at that time. A bike was just enough. In fact, it was better for all the leg work I was doing.
Catalysts in Making Transactions Possible
At this point, there are three factors that I want to discuss with the reader that made this possible.
- Easy availability of loans – banks were falling on each other at that point of time to give loans to creditworthy clients and I had more than mastered the art taking loans and convincing credit managers why such investments were beneficial. All my rental income were reflected In my income tax returns Which lent necessary comfort to credit managers.
- Legwork – The amount of legwork that I used to do was insane. You can’t expect to generate this kind of return if you’re not willing to put in commensurate efforts. Because of this legwork, I also been built up good sense of which property is good and which property is bad and to be able to distinguish which area will develop and which will not. If you don’t have this sense you will end up in investing in something that will eventually become junk. I made few other investments like 1 flat at Koregaon park which was gifted to a builder’s wife by his father and was part of 16 such flats given as wedding gift. I was quite amused by seeing what people gift it to each other.
While you may also be amused by this story where I continuously brought properties by making minimal down payments, I also suffered from one very big problem and that was selling early. While the property prices were going up, I didn’t have much patience to hold the properties I purchased. The first property that I sold was the one that I bought from the builder directly with no money. A lady approached me saying that she was adopting a baby girl and wanted a good place to stay in. I simply accepted what she had to offer and sold the flag to her. The price of this flight eventually went up four times in value (current prices while I write this article) while the lady continues to stay there.
By this time, I was also tired of running around finding tenants and giving the place on rent. I started exploring commercial properties because of two reasons. They offered higher rental yield and tenants tend to stay longer.
One day, in Mumbai, I read an ad at Times of India classified column for a flat available for sale in Dadar. Whoever knows Mumbai knows that Dadar is a prime place. Out of curiosity I just called up the advertiser and visited the flat. At the time of the visit there were at least five or six more families that had come to see the apartment. It was at a very good location but the flat by itself had very poor interiors it was in dilapidated condition from inside. I had personally done a course in interior designing by attending a one-year weekend program so I could imagine how I would transform this place. But, I had no hope this time. I knew when there were so many families interested, how could I even think of buying it and that too again with no money in hand. The broker who showed me the flat told me that the seller lived in the US and wants to sell this place for 78 Lakhs. I had no money with me. Not even Rs 1 Lakh. So I just made a casual offer of 68 Lakhs knowing very well that he will just dismiss me as a window shopper who was offering ten lakhs lesser than the seller’s expectation. As time passed by, I even forgot about this visit. Three months later, I got a call from the broker saying that the seller was willing to sell at 68 lakhs . I was quite surprised as I was not even serious at the time of making the offer, and brokers normally read how serious or frivolous a client’s offer is. I fixed up with the broker again and this time took my wife to see the flat. The location was obviously very good and the flat was very spacious. I had learnt earlier that I need not get the apartment measured. The price was also right. The only problem was, as usual, I had no money. But I have realized one thing – that if you make up your mind to buy a property then everything starts falling in place and you end up completing the transaction.
I asked the broker to wait and went down and withdrew rupees one Lakh cash from my credit card account and give him the advance as token with one clear message in my mind that this property is next to impossible to acquire. I knew that payment of Rs 1,00,000 was a risk but was willing to get that amount forfeited in exchange of giving it a shot. When I asked for the documents from the seller, the broker came back and told me that the seller had lost all documents of the flat but indeed he was rightful owner. His argument was that anybody could lose documents in flood or fire and that doesn’t make him an illegal owner. By the time I came to know about not having documents I had already started speaking to one of the leading multinational banks for a loan. The credit manager flatly refused me saying that such a case would never pass the legal scrutiny of the bank and that if I had any hope of taking the loan I had to bring in all the documents. I explained this to the seller. I also told him that this will be a prerequisite if he ever wanted to sell this property to anybody else. I told him that I was willing to engage a lawyer to get all the documents re generated up to a point where it is acceptable to the bank’s legal department. However, the whole process would take at least six months and that he should get it done simply because it was in his in own interest. The seller agreed. For him, not only did he have a buyer, he had a buyer who was also getting his own documents regenerated at his cost. Who else would do this for him, while he continued to live overseas. Any other buyer would have demanded all documents upfront or would have walked away from the deal. However, I wanted time. And I was willing to put up effort in order to buy out time and make my purchase fully acceptable to bank too. A journey then began where I took nine months to get his documents regenerated through one of the top most property lawyers in Mumbai where it came to a stage where Citibank offered me a loan against that same new set of documents and I could complete the transaction. I could put in good down payment by selling off my properties in Bangalore and Kandivali, Mumbai (my first purchase). All these transactions could see The light of the day simply because of nine months that I got to complete the transaction while I was getting the documents regenerated. This property was good because it was act reasonable cost. I also started getting very good rent on it, which was a reflection of the prime area where the flat was situated. I also did the interiors very beautifully. It has a bathroom bigger than many people’s bedroom and I got a bathtub installed in it.
Over a period, I ended up doing about 15 purchase and sale transactions giving me good insight in property markets and also earning good capital appreciation for me. I will spare the details of other transactions, but I will summarize my key learnings for the readers.
Learning & Conclusion
- These kinds of transactions are dangerous if you do not have sufficient liquidity and money in your bank account. It worked for me that time but will not work for anyone else and even for me now. This is because at that time there was sustained capital appreciation in property markets fueled by speculative buyers in the market, including me. Every time I sold properties I made money on them which in turn greased my future transactions.
- My salary was stable, and I was enjoying a good career. Hence loans and EMI payments were possible without default.
- Loans were abundantly available that time and banks were willing to fund up to 100% of the property value which they don’t do now. In fact banks are now reluctant to give loans beyond two or three properties.
- What is an absolute spoiler right now is the overall capital value needed to make the investment in property. Properties that were earlier available for Rs 25 to 30 lakhs are now available between 1 crore to 1.5 crores in these areas. This means that anyone earning fifty sixty thousand per month cannot even think of buying multiple properties in the current market scenario. Whereas I could begin when I was in this salary level. Today he can only buy one property and exhaust all his loan taking ability.
- The days of sustained capital appreciation is also over. It is difficult to buy and hold properties and keeping paying interest and bearing the cost while the property sees no appreciation in value. According to me, it was once in a lifetime opportunity that I and investors like me were able to harvest while the property market was going up and is very difficult to replicate right now with stagnant property markets and stagnant income. Post covid crisis the values of property has fallen by 10 to 20% or even more in some areas but people’s earning ability has also come down. This makes the situation even more dangerous.
- In the hindsight I think that if I had invested money in stock index like Nifty or Sensex I would have been better off. In every property there is one equity and loan component. As investors we try to keep increasing our own equity add reducing our loan by paying EMIs. Today the situation is that I have four prime properties with full own equity (loan is paid).
- I continue to get good rental income in it which is annuity income that I had set out to generate. However, it has come at a huge cost of running around, shortlisting properties, talking to builders, brokers, housing society members etc. and I personally feel that stocks with low transaction cost which a single person can invest in and get out whenever he wants maybe a good proposition to look for, provided you understand stock markets well.
A note on 3% Yield on Property
It is widely believed that property yields 3% rental yield which is very less. It is true. However, one needs to keep in mind that because of capital appreciation, I get 3% of 1.25 Cr (current value) now on property that was earlier giving 3% on 26L (purchase price). This yield is less but reliable and doesn’t fall like saving or fixed deposit interest rates. The covid problem is still on and there is loss of rental income while I am writing this article and need to see its impact on long term rents. A part sequel to this article may be required.