Bachelor's guide to surviving financially in Mumbai

This post applies to youngsters, aged 22 - 25, earning salary between INR 3L to INR 4L who come to Mumbai for their jobs and stay in rental accommodations. If you have your own place, for which you don't have to pay a rent, in Mumbai, you might as well browse elsewhere since this post has nothing to offer you. Just passed college graduates or those finishing their final semesters with a job offer in hand are ideal candidates for this post. However, even if you don't  fall in this category, but stay in rental accommodations, then this post is for you too.

This post is motivated by two things - 

• Having undergone the pains to buy a house in Mumbai, I now wish to be of help to others, setup theirs
• Observing youngsters spend their money I feel a small paradigm shift in the way of their thinking can lead to tectonic change in financial status ( read financial independence).

Ok, so without further delay let me table the idea.

Part A - As-is state

Typically, such a mobile youngster stays with 2 to 3 roommates and spends about 6K INR as monthly rentals. Accommodation is within 20-km radius and spends on public transportation including rickshaws and taxi. Assume 3K INR for transportation cost. Also, the cost of living in proper city including socializing would be higher as compared to undeveloped suburbs. To round-off lets assume an expenditure of 15K per month. Round that off to 2 Lakhs per year. If one stays like this for 5 years he will be 10L INR poorer without having built any assets.

Part B - Proposed change

Mobile youngsters, as described above should move to outskirts of the city preferably within 50-km radius where the cost of a flat is still in the INR 35L - 40L range. Assume zero bank balance, each such youngster will be eligible for a loan of about INR 16L- 17L. If 3-best friends can pool, they can gather a corpus of about INR 50L. This can cover for the cost of a 2-BHK in somewhat remote parts of the city like Vasai / Virar, Taloja, parts of New Mumbai, both sides of Ghodbunder Road (Thane-side and Dahisar-side) etc. The INR 50L corpus can also fend for stamp-duty / registration and any additional liquidity needs. Next comes, the question of commuting from this place to your work. The *ONLY* feasible way IMHO that is the best balance between saving time and money is to travel by 2-wheelers (preferably geared bikes) . The 50L corpus can also buy 3-bikes. Now comes the million-dollar question that - Will banks lend to 3 friends?

No and Yes. No - because if they don't want to lend they will simply show their policies and back-off and Yes - if and only if - you convince them that it is safe to lend money to you. 

After all, the banks have a right and an obligation to ensure that their lending should not become an NPA (non-performing asset). So you will have to woo them, persuade them and convince them that your intentions are honest and you are men of integrity who are serious about paying off the loan. Let's look at some of the ways of raising the capital.

1. Have 3-set of parents be the guarantors.
2. Typically banks assume that you save 30% of your income. Their lending decisions are heavily influenced by the amount you save and not the amount you earn. Read about How the banks calculates loan eligibility?. If you can convince them that you can save more than 30%, you stand a higher chance of securing a loan.
3. Non-banking financial companies (NBFCs) are also an option. They are typically not as strict as banks and they are also in the business of making money. So your loan request is actually a chance for them to earn interest. If they are convinced that its an honest deal, they will lend.
4. If you hunt hard enough, you will be able to find that one bank manager who is hard pressed to meet his targets. Show him the seriousness to buy the house and the unity amongst the three of you. High chances that he may relent.

Bottomline - You are honest, integral and earning individuals who have thought about your financial future and have a plan to execute it. Once you translate this feeling to the lender, you will succeed. Trust me.

If you still need some motivation to cultivate belief that you can get a loan, read up about how the entire Microfinance industry came up. Read up how Dr. Mohammed Yunus brought up the Grameen Bank in Bangladesh which offered loans without any guarantors in Banker To The Poor.

Part C - The Tough Life Begins

After you have bought your house, the hard work begins. You will have to travel longer and harder. Your transportation cost will increase. You may not get enough time for yourselves as you used to get when you were staying closer to the city. You may find it difficult to get domestic help. Load-shedding could bother you. Internet and mobile feeds could be feeble driving you to point of frustration. You will have to take part in society meetings, pay maintenance bills. Scratches on the paint and leaks in the wall will slowly start maddening you. Your bikes will need more maintenance and could eat up your weekends. Some days you may even have to cook for yourself when the Bai falls ill. The cricket playing children and their out-of-control ball will suddenly become a nuisance value when you start thinking about your window glass panes. Bad roads and waterlogging

As a short term solace, you will have saved INR 6K you spent on rent, but because of the above, it will never make it to your bank account. A little bit bigger bonus is that, you will start getting tax benefits. You will be pleasantly surprised when your take home salary increases slightly because less tax is deducted from your salary.  Be content with that for the next 60 months. There are no more goodies. So, what's the advantage you may ask? Why slog so much?

Part D :- The Advantages

1. You become a home owner. A place where you can continue to stay without worrying that 11-months are getting over. Leave license agreements in Mumbai are typically 11 months.
2. You grow as an individual and appreciate the value of money.
3. The slog teaches you so many important lessons of life that you cannot hope to learn in a easy-going life.
4. Your bonding with your friends and co-owners will deepen, grow extremely strong and will last a lifetime. A financial partnership gone well, exhibits this potency, especially when it is hard-earned.
5. When you have clarity of thoughts, your performance at work will also increase. Petty things (such as lease expiry, rent affordability) wont bother you because you will have an inner sense of security.
6. In my personal opinion, financial success also brings success to every other sphere of life, provided it is legitimately achieved. So your face value as an accomplished individual will go up.

 Part E :- Fast-Forward ... 60 months later

The biggest gain, will come in the end-game. 5 years later, its reasonable to expect a 25% appreciation of your property value. So your 40L buy would now be worth ~50L. In 5 years, your outstanding principle would have reduced by INR 4.5L (assuming 10% rate of interest). So you would have a net cash of 50 - (40 - 4.5) = 14.5L INR if you sold the house and closed the loan, after 5 years. So your individual profit would be INR 5L. So at the end of 5 years of your bachelor's stay in Mumbai, instead of being poorer by 10L you can be richer by 5L. Now isn't that worth trying?

There are plenty of other options to explore when you have a house of your own. You are best-suited to make those decisions for yourself. So it needs no elaboration.

 Part F :- The Caveats

To execute a big financial deal, all 3 of you must have a very good understanding amongst yourselves. You can always seek financial advice from others, but you have to have extremely strong friendship bonds for this venture to succeed. The friendship and understanding between 3 of you must not be any less than Jay and Veeru of Sholay fame, or else it could be one of the worst decisions of your life. You have to take this gamble based on your gut feel.

Another, point to consider is that after dissolving your first house and trying to buy a second one, the banks will consider it as second home loan. Normally when your first loan is fully paid-off, there is no liability and no issue in getting a second one, but you should read up second home loan rules for taxation purposes.

Have skipped the details in some places, to keep the post size small, but if anything is not clear to you, please do post your comments and I will be happy to answer.

So, all you close friends, team up and begin your journey to financial wellness. All the Best !!