How to take Loans to Make Money - Benefits of taking a loan
Introduction
In today’s discussion, we delve into the world of loans, but not in the way you might expect. We won’t be talking about the run-of-the-mill loans that plague many with debt. Instead, we’ll uncover the strategic potential behind taking a loan – how it can be used to unlock opportunities, create wealth, and secure your financial future.
So, what’s the buzz about loans and wealth creation? Let’s break it down.
In this blog, we will explore the following key topics:
- The Villa in Goa: A Loan with a Purpose: A real-life example of how taking a significant loan to invest in a specific asset can yield substantial returns.
- The Art of Smart Leverage: Understand the various factors that make taking a loan a smart choice.
- The Asset vs. Liability Dilemma: Not all assets are created equal.
- Assessing the Goodness of an Asset: When considering a loan for an investment, it’s essential to pick the right assets.
- The Perils of Over-Leveraging: While loans can be advantageous, there’s a limit to how much leverage is healthy.
- Volatility Matters: Finally, we’ll discuss how the nature of the asset impacts the wisdom of taking a loan.
Now, let’s dive deeper into each of these topics to uncover the secrets behind harnessing the power of loans for financial prosperity.
1. The Villa in Goa: A Loan with a Purpose
I took a loan of one crore rupees to purchase a villa in the serene landscapes of Goa. Why would anyone take such a significant financial step? Well, let’s dissect the math behind it.
Understanding the Villa Investment:
The villa investment wasn’t a frivolous choice. It’s an asset that generates rental income through Airbnb. With a down payment of 90 lakhs and an EMI of 80,000 rupees, the monthly inflow from rentals nearly cancels out the outflow, leaving an investment of 90 lakhs.
The Magic of Leverage:
But here’s where it gets intriguing. Fast forward to 2032, and even with a modest 2X growth projection, the villa’s value is estimated at around 4 crores. That’s almost a four-fold return on the initial investment of 90 lakhs.
How is this possible? By opting for a loan and harnessing the power of leverage.
2. The Art of Smart Leverage
Why choose a loan route instead of paying outright for the property? Several factors come into play:
Safety and Verification:
Banks conduct rigorous property verifications, ensuring you’re investing in a safe, non-disputed asset.
Favorable Interest Rates:
The current interest rates are friendly, but they could rise in the future. Locking in a fixed-rate loan now provides financial security. Currently its possible to get these loans at around 8%. Additionally its also good to get a fixed loan instead of a floating one since its likely that this rate can go up.
Tax Benefits:
Loans offer tax benefits, allowing you to save on interest payments.
Business Expense:
Some portion can be claimed as a business expense if you’re generating income from the property.
Scalability:
But that’s not all. Loans enable scalability. If you can identify more such lucrative opportunities, loans provide the means to seize them, multiplying your potential returns.
3. The Asset vs. Liability Dilemma
Before you follow suit and grab the nearest loan, it’s crucial to understand the nature of the asset you’re investing in. The distinction between assets and liabilities isn’t universal. What’s an asset for one person might be a liability for another.
Assets vs. Liabilities:
Assets are what put money in your pocket, such as income-generating properties. Liabilities are expenses that take money out, like a fancy car or the latest iPhone.
The rule here is clear: avoid loans for liabilities.
4. Assessing the Goodness of an Asset
If you’re considering a loan for an asset, aim for the ‘good assets.’
What makes an asset ‘good’?
One criterion is its potential to appreciate in value over time. Real estate, especially land, fits this description. It’s a finite resource with a history of value growth.
ROI and Payback Period:
Return on Investment (ROI) is another yardstick.
Calculate the payback period – the time it takes for the asset’s returns to cover your initial investment. A shorter payback period, typically less than four to five years, is a sign of a promising investment.
Personal Circumstances Matter:
Yet, your unique circumstances matter. Consider factors like your age, responsibilities, and risk tolerance when evaluating an investment’s goodness.
5. The Perils of Over-Leveraging
While loans can be a potent wealth-building tool, there’s a fine line between strategic leverage and over-leverage.
The rule of thumb is that your total EMIs shouldn’t exceed 30% of your income. Straying beyond this limit could spell financial trouble in times of unforeseen hardships.
Diversified Income Streams:
Remember, having multiple income streams and not being overly reliant on a single source is your financial safety net.
6. Volatility Matters
Lastly, the nature of the asset plays a vital role in determining whether a loan is a wise choice.
Volatility, or the certainty of cash flow, varies between asset types. For instance, stocks and gold have their own cycles. Real estate, especially rentals, offers more predictable income streams.
Asset Volatility:
Taking a loan to invest in highly volatile assets, like stocks, is often discouraged. Stability and predictability should guide your loan-related decisions.
If you are a new stock market investor or are looking for advanced techniques with a focus on better returns, check out this course on Stock Market Investing which covers all the aspects from Fundamental Analysis to key concepts like Macroeconomics and Wealth building.
Conclusion
Loans are not to be feared; they’re financial tools that, when wielded wisely, can open doors to prosperity. Invest in good assets, avoid over-leveraging, and consider the nature of the asset before taking the plunge.
Remember, the path to wealth isn’t about avoiding loans altogether; it’s about using them strategically to propel yourself toward financial freedom. So, evaluate your options, crunch the numbers, and make informed decisions.
- Loans can be used strategically to create wealth and secure your financial future.
- Example: Taking a loan to invest in an income-generating property, like a villa in Goa, can yield significant returns.
- Smart leverage involves factors like property verification, favorable interest rates, tax benefits, and scalability.
- Distinguish between assets (put money in your pocket) and liabilities (take money out), and avoid loans for liabilities.
- Assess asset goodness based on potential appreciation, ROI, payback period, and personal circumstances.
- Avoid over-leveraging; total EMIs should not exceed 30% of your income.
- Consider the nature of the asset and its volatility when deciding to take a loan.
- Loans are financial tools that, when used wisely, can lead to prosperity by investing in good assets and making informed decisions.
