Here is how one of my friends managed to make a great ROI.
Having worked in the IT industry in Bangalore, this person had Rs. 1.9 lacs ($3650) in his savings account. All of us know that this amount is not enough for investing in land in Bangalore. However, unlike most of us, he decided to do something about it. He sold some gold (worth 1.5 lacs / $2850), took a few bank loans (8 lacs / $15400) and saved aggressively for two months (another 0.6 lacs /$1150) - he thus managed to have a capital of Rs 12 lacs ($23000).
When you need funds – they say you can go to FF – FF stands for “family and friends” (there is also FFF - it stands for family, friends and father-in- law). So this friend of mine followed the FF route – he borrowed Rs. 6.25 Lacs ($ 12,000) @ 10% interest cost. Most of these loans were for one year duration.
So starting with Rs. 1.9 lacs ($3650), he managed to get ten times that amount - Rs. 18.25 lacs ($ 35,100).
As he was arranging funds, he also identified cheap BDA plots (BDA stands for Bangalore Development Authority and the plots sold by them are legally clean and hence safe and easy to sell). Unlike most of us, he took the route of the smallest plots available (20*30 ft plots) -he identified two localities in the outskirts of Bangalore – and he bought two 20*30 ft plots of land between Feb 2012 and April 2012. His logic of buying the smallest plots available was that most plots are 30*40 ft or 60*40 ft and hence these small plots would be a rarity and so will have lower competition while selling (and he was right). He registered the two plots for a total of Rs 24 lacs ($ 46,100). As he fell short of funds, he enlisted another friend, interested in investing in land, as a partner for 50% share in one of the two plots for Rs 6 lacs ($ 11,540).
As he had to pay back the loans after one year, he put the plots in the market within six months of buying them. To his surprise, the prices kept going up every month. And finally in December 2012, he sold the two plots for Rs 33 lacs ($ 63,460) - so within nine months, by investing 24 lacs, he got Rs 33 lacs – he made Rs 9 lacs ($17,300) – that means the land price appreciated by 50% on an annualised basis.
Does it look good – I am sure you will be nodding a YES (so am I)
What he did well – The best learning for me is the way he managed to get the funds – this just shows that there is always a way. He also was creative by going with the smallest plots sizes available – he had segmented the markets and was clear that he will have a higher negotiating power with this segment. He also identified safe and legally clean plots, he identified good outside locations, he used lawyers and brokers (they are needed for any real estate deal in India) and he acted decisively (many of us will take longer than him to act).
What he could have done better – well, he took one year loans – he should have taken a longer term loan as the cost of capital was only 10% per annum and the price appreciation was 50% per annum. Also this transaction will attract short term capital gains tax in India – he will end up paying 10-30% of the gains as tax. Ideally he should have managed to keep his FF at bay and kept the land for 3 years and then exited – post three years, the taxation is lesser as it is a long term capital gains tax.
For more information on investing, you can read at my book -"How to get rich and retire early" (available on flipkart and homeshop18)
So finally - here is the investment opportunity for my readers – if you want to join with this enterprising friend of mine – either as a equity partner or as a debt– he is looking at the next set of plots – he surely needs more funds and even though he may not get the 50% annualised returns, I do believe he will surely get 25% plus returns. If you want to participate, please do write to me at email@example.com and I will introduce you to him.