What I told a frustrated guy in job. At 37, he retired last month – Part 2

Before I continue from where I left in part 1, I will briefly summarize what happened earlier for benefit of new readers…

A few years back, I met a guy who was frustrated with his job and life. He had a big home loan, was earning decently, but just sufficient to make his ends meet every month. Surprisingly, he had a plot of land worth several crores which he till that date, had failed to utilize productively. 

In part 1 of this post, I suggested following 5-point action plan to him:

  1. Sell the land & use the money as described in steps 2 to 5.
  2. Pay off the home loan
  3. Create an emergency fund
  4. Set aside money in fixed deposit which would provide monthly interest income equivalent to his monthly salary.
  5. Buy flats and rent them out to create additional streams of income.

Now let’s continue with what happened next…

This guy gave me a call last Sunday and told that he had actually thought a lot about what I told him two years back. He then discussed the approach with his parents and other family members before taking a final call 6 months back.

What he did then is summarized below:

  1. Six months back, he sold off the plot of land for Rs 9 Crores (post tax).
  2. Almost instantly, he paid off and closed his home loan of Rs 70 Lacs.
  3. Parallely, he created an emergency fund of 30 Lacs to cover his family’s expenses for next 24 months.
  4. Five months back, he parked Rs 4 Crores in Fixed deposits, which now provides him with a post tax monthly interest income of more than Rs 1.75 Lacs (Much more than what he drew as his last salary).
  5. In next two months, he bought 7 flats worth Rs 3 Crores and managed to put 5 of them up for rent. Rental income from these 5 flats is more than Rs 80,000 per month. He is still waiting to put remaining two flats on rent.
  6. Just two months back, he bought a small warehouse (godown) for Rs 1.1 Crore. As of now, he is pretty close to cracking a deal with a logistics provider for renting out the property. Probable rental income from this property is expected to be around Rs 75,000 every month.
  7. With home loan paid off, and earning in excess of Rs 3.2 Lacs a month without going to office for somebody else, this person quit his job (read retired) after celebrating his 37th birthday last month.

How to use your inheritance
A brilliant example of how to use your inheritance

Astonishing…isn’t it? How life can change with one simple decision. 

A reader commented in part 1 of this post that this guy was simply lucky to have inherited such a plot of land. 

I am not sure whether its right to give all credit for this guy’s success to luck. Agreed that you need to be lucky to inherit something like that. But I assure you, mentally and emotionally, it’s not an easy decision to sell inherited properties. It’s a tough call to make. It may seem simple up front. But it is quite a difficult decision to sleep with. Anyways, we are not trying to judge anyone or anyone’s luck here.

The fact is that this guy does not need to work again for anybody else.

And for emphasis, I repeat.

This guy does not need to work again for anybody else.

And just to give you all an idea of how a person’s decision making changes when passive income starts flowing in….this person told me something, which will further astonish you.

He is currently earning Rs 3.3 Lacs from his investments. With renting of two additional flats, he might start earning close to Rs 3.7 Lacs. He told me that frankly speaking, he did not need more than Rs 50,000 every month for his normal expenditures. This left him with Rs 3.2 Lacs surplus every month. He himself suggested that he was thinking of choosing between the following 3 options to park his surplus funds:

  1. Take property loans (approx Rs 2.5 Crores) which would use up this Rs 3.2 Lacs in EMI. The property in turn could again be rented out to generate more cash.
  2. Put money in stock markets using SIPs in good mutual funds and direct equity investments.
  3. Start a small money lending business.

For the time being, it’s irrelevant what I suggested him and what he eventually chooses to do. But this tells how a person starts thinking of ways of making money once he is out of the mad rat race of getting salary every month. The decision making and thought process changes completely.

We talk about value unlocking in properties held by companies. And here we have an exceptional example of how normal people like you and me can unlock value from existing properties. Once unlocked, the money needs to be managed as prudently as possible. And with systematic approach like the one taken by this person, its now money which is creating more money.

By the way, he is not frustrated any more. 🙂

What are your thoughts on this?

______


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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

27 comments

  1. Take a good advice when doled out.

    Not every free advice is bad, nor every paid advice is worth its value. Understanding this difference is wisdom

  2. Indeed a great post. I must say, this post studied with rapt attention of part 1 and could not wait any longer for part 2. You didn't disappoint me as it came quite quick. Why rapt attention, we went through similar instance in our family albeit 7 years ago.

    After unlocking the inheritance, almost same thing followed. Cleared some liabilities, 50% of the money locked in FDs, 40% of the money used to buy 4 flats and land and some 10% was locked in private lending and other miscellaneous purchases (car, gold jewellary, gadgets, house furniture etc..).

    Let me recap what happened in 7 years and where we stand today.

    Although cash flow was great in terms of interest from deposits and rent, expenses too shot up especially kids school education and medical expenses.

    We are unable to sell the flats as there are no takers owing to refusal of lending by bank for older properties. Each time tenant vacates, it needed a big corpus (6 digits) to get the flat ready for the next tenant. We realised that flat is an expense but not an investment.

    Noted big pick up in donations prompted by lot of seekers (relatives & friends) knowing of our good fortune. Life style pressure mounted and foreign vacations followed including penchant for big brand items and gadgets.

    Today as it stands out, our expenses are near our earnings (deposits & rentals). Whatever little been saved of our surplus, bought some lands without any cash flows.

    I am still worried about college education for my kids and also our retirement home planned to build at our home town.

    This is what I see the flaw. Our ice mountain is melting. All our investments (deposits, rental) are yielding way below the inflation returns. 3 lacs a month looked a great amount for the life style 7 years ago but not now.

    Today am worried as we do not have multi bagger in our portfolio. It could have made the big difference. The only silver lining is I have kept my job so far helping with decent increment year after year and retirement corpus. I feel this guy could not have quit his job. Guess he would notice his mistake after a decade.

  3. There are many people in India (and I know a few) who live all their lives in misery clutching such inheritances close to heart. Usually it is gold or ancestral homes.

    People continue to hoard such treasures through the bad times to provide for bad times. Selling family silver(or gold) is a social taboo.

    It is good that one person could break free from the shackles. Many of his actions and plans are questionable though. Actions 1 to 3 are good. FDs should be replaced by FMPs or Debt funds – to make post tax returns better. Real estate has its own share of problems. Read comment by Krish. Quitting job is very bad. He will have nothing to do and this in itself is a problem. Plans 1 and 3 are disastrous. Plan 2 is not an easy plan to implement.

  4. I agree that disposing off an inheritance would be among the tough decisions… But if done properly, it can definitely free us up from so many limitations and burdens. The difficulty only begins with selling it off. The more difficult part is to invest it in various sectors, so that one has a balanced portfolio.

  5. Correct. Disposing off is just one part of the game plan. Eventually, the success of the master plan depends on how well the cash being generated by investments is used to create more cash generating assets.

  6. I am personally against plan 3, which would eventually create a NPAs. 🙂 And when one considers the peace of mind aspect, this option is a complete non-no from my side.

    Plan 1 is tough for the time being. And this would greatly reduce the buffer which is there right now. And going forward, when expenses rise, the buffer of 3.2 lacs would start diminishing. And that would become a problem going forward..

    It would be prudent if he waits for a few years to see how the plan is working and then take a call.

    As far as plan 2 is concerned, it can be taken up, but it should not utilize the full buffer of 3.2 lacs. May be start with smaller amounts and then make bigger bets when markets go down in future.

  7. I feel that if you are investing in flats for investment purposes, it makes sense to buy flats in relatively undeveloped areas, and then wait 3-5 years, and sell them off! This way, you are cashing in on the development in that area, and the spike in desirability of the area makes your flat a great sale! If you wait for more than 5-7 years, there'll always be the problem of “Old Flat” perception.

  8. Thanks a lot Krish. The points which you have raised are really critical ones and I think must have been thought through by that person. Fingers crossed. 🙂

    As far as leaving the job is concerned, that guy seems interested in starting a small venture of his own. But that path in itself is a tough one. You are right, we can only wait and watch how things pan out for this guy.

  9. We need to learn something from Mr Piramal. How he parked his money in Vodafone . When market conditions were not so positive he brought 10% stake in Vodafone and recent deal fetched him hefty 50% return in just 2 years. So around 4k cr. in just 2 years … 🙂

  10. It is definitely a good idea to create passive income. Buying a new house by paying 11% mortgage is not necessarily a great idea as the yield from rentals is less tgan 3%. I believe that keeping your skillset current is important and leaving your job is not a good idea. Investments will only keep up with inflation and hence spending any part of it only reducing your real principal over time. Retirement at 37 with 40 years to death and living on passive income is not a good idea.

  11. Mr Ajay Piramal is a brilliant capital allocator. Only if we could learn from him. 🙁
    But its really tough to stay away from investing (correctly or incorrectly) if one has a war chest of cash at your disposal. And that extra stack of cash can become a 'curse' in disguise.
    May be coat tailing great investors in listed equities can be a starting point for average investors like us 🙂

  12. Your point of keeping yourself busy (skill set current) is a good one Analyser. But I think that if a person uses just 50K of the 370K being earned every month, and if that difference of 320K is parked judiciously, it is possible that person may not be required to work again. In this case of using 320K, the principal remains intact. What do you think?

  13. Depending on rent income often proves fickle. It does not even beat inflation. If he has purchased 6 months ago, then he probably purchased at the peak of a possible real-estate bubble. I think he should continue your consultation and purchase stocks and get out of so much property.

  14. Hi Amit
    I have not suggested this guy to get out of property. All I meant to say was that its better to be diversified when thinking of deploying the extra cash coming in every month.

  15. The discussion seems to have become quite a useful one guys.
    Thanks for pouring in with your ideas and suggestions.
    My request here is that you guys continue giving more feedback about this approach. This would help in improving the idea of how to manage your inheritances well.

    Note – Feel free to tear down this approach to critically evaluate it. This will be more helpful than positive feedback. 🙂

  16. Monetization of an inhereitance is one thing but many ignore the key aspect of handling it post sale. This is what I could have done going back 7 years ago :

    1. Could not have cleared home loan as the interest gives me the tax benefit. Moreso, given the significant interest from the FDs.

    2. Should not have bought a single flat. Every year, we were hit with big expense like corpus required for DG set repair, capacity addition, Wastewater plant upgradation, Rain Water Harvesting, Public Sewer connection, Transformer, Drinking water connection, Repairs to structures after monsoon, fixing after tenant goes off, 5-year overall repainting and hell lot unsolicited breakdown of utilities. These are not part of monthly maintenance. I have 7 year records of expenses and rental being taxed, I can tell that these rentals never covered up the full expense that I have incurred so far. I have not counted my effort & time. The rental management is a by far the biggest headache for me and gives me nightmares. Worse, none of my flats are selling because market considers them as old.

    3. Could have invested all the money in debt funds (50% Growth, 50% Quarterly payout)

    4. After decent quarterly payout accumulation, could have invested in Equity MFs and Residential plots in small towns. In the long term, only MFs, Direct stocks and Lands are game changers for wealth accumulation. Everything else is an expense. I believe, land is like sapling capable of growing as big tree given a massive population and ever demand for growth and space.

    5. Should have convinced the family not to buy gold & diamond jewellary, Fancy cars, Foreign vacations, Multiple E.gadgets for the entire family members. The school upgradation which we have done is quite an expense proposition. This alone is capable of multiplying the expenses several folds if one is having two kids. However I won't count the school upgradation as a splurge still.

    By doing above, I could have atleast protected the capital of the inheritance. Flats, Gold & Diamond, Cars, Vacations, Gadgets, Donations and so on are wealth destroyers.

    This guy should not have quit the job until the business is kick-started. Any business starting after inheritance is more of time pass and is unlikely to succeed. This is out of plan activity and thought to fill the job loss time. It would never work. I can go on. Sorry if the post is long.

  17. Thanks a lot for sharing your experience with me and other readers Krish.
    I will use these inputs provided by you and few others to write a part-3 of this post.
    This would help in highlighting the concerns raised by you in front of a wider audience, who otherwise do not take part in discussions by means of comment and prefer to just read the contents in main post.
    Thanks once again 🙂

  18. This is not even a story. If I inherited 9 crores worth of property, I would have retired straight out of college. That kind of cash in hand is a game changer for anyone. No special financial saavyness or money management needed either. Just keep in FD and be done for life. Forget about real returns, inflation and all that stuff. That is for poor people and a guy with 50k expenses having 9 crore in bank shouldn’t have to worry about these things ever.

    All credits should go to his ancestors who worked their backs off to own that piece of land.

    1. Ancestors ofcourse should be given credit. But taking that decision is not easy too. Many people continue staying in houses worth crores, holding lands worth crores and still working in jobs they hate. So, some credit to the guy who took that decision too. 🙂

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