Viraj Khatavkar
When Does It Makes Sense to Take Leverage

I am typically averse to take any kind of loan for personal consumption or achieving anything in life. But there are few cases where taking leverage would help us get ahead without much downside. Sometimes there come opportunities where the return is exponentially more significant than the cost of leverage. Below are the few opportunities where I'd be willing to take some loan:

Buying a Piece of Land

I'd say to never buy an apartment in a building on a home loan unless you can pay a minimum downpayment of forty to fifty percent. But if you can get a piece of land at a reasonable price, then I am okay to take an 80% loan and only a 20% downpayment. Land is a tangible asset with a 100% right to ownership. An apartment, however, is an ownership of the land which you share with 100 other families. In the longer term of 30-40-50 years, the value of land is probably going to increase. You can turn that land into a productive asset by doing some business or renting it to someone else. An apartment would be useless after some decades due to the old age of that building. You probably have to resell it to anyone else, or everyone has to agree to redevelop the whole land into a new project. Basically, you don't have any control over the outcome of the decision. While with a land - you can do whatever the hell you want! My personal goal is to buy a piece of land somewhere remote while staying on rent in Mumbai.

Buying a Commercial Property

A commercial property may include a shop, office space, or some kind of business-related space in a city. The rental yield on commercial property is usually higher and increases with inflation. In case of buying such property, I'd be okay to take a 75% loan. But make sure that the rental yield is within 1-2 percent of the ongoing FD rate. Further, it needs to be located within one of the prime areas to ensure that the rental yield will increase with inflation every year.

Buying a Business where Return Is Twice the Cost of Leverage

It is okay to take a 10% interest loan to start a business that provides a 20% return every year on the invested amount. This way, the spread between the cost of leverage and the return on capital is wide enough for me to bear that burden. The tricky part here is to understand whether the business will be able to provide that 20% return.

When Would I Absolutely Not Take a Loan

I'd never take a loan for personal consumption like home, car, long vacation, mobile phone, etc. But I am absolutely fine to take a loan for a business or land or a commercial shop/office with higher yields and pay me back with increasing cash flows every year.

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