The ‘House Hacking’ Loophole Letting People Buy Homes With 10% Down Payment in India

I was in the dilemma of rent vs. buy at the age of 28 earning Rs. 8 LPA in Bangalore. I was spending crippling Rs. 22,000/month rent on a 1BHK in Whitefield. My landlord would flog me with a 8 per cent renewal of the rent every year. What I earned out of my discipline in saving was not increasing rapidly enough to keep pace with the property prices which seemed like another dream. It appeared completely impossible to afford the 20 percent down payment on a flats decent flat. I was innocent of running on a financial treadmill that was currently gaining momentum.

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Then I found out house hacking -the Indian method. It is not merely the matter of sharing rent but a legal, tax efficient practice to utilize a home loan, the government and a tenant to settle the initial property.

House Hacking Loophole in India

Two years later, my life is a significantly different thing. I now own a Rs. 72 lakh 2BHK. My full EMI is Rs. 48,000. But the loophole is this: I occupy a room in one place and hire out the other at Rs. 18,000. To top that I legally get benefits of HRA with my company and deductions of Section 24 to cut off my taxable income. When you do the calculations, it is important that my effective cost of living in my own house and creating equity is only Rs. 8,000/month. That’s less than a shared PG!

I am accumulating a mediocre average of Rs. 35,000 equity per month. The goodwill I have earned because of this first property will be used as the deposit to the second investment property next year.

It is not a fantasy strategy but a methodical method that is applied by thousands of young Indian professionals. In this complete guide, you are going to know precisely:

• The easiest ways to purchase your first-time property with as little as Rs. 5-10 lakhs cash down.

• The specific home loan plans that would enable them to take a huge home loan.

• How you can legally reside in your own house and still get the tax deductions.

• High case studies in high cost cities such as Mumbai, Bangalore, Pune and Hyderabad.

• Stop paying the mortgage of your landlord. Begin creating your personal wealth.

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Issues in House Hacking in India

Overall, the concept of Indian Housing Crisis among Millennials is founded on the ongoing financial strain caused by increased population, housing prices, and the cost of transitioning to homeownership.

Indian property market, especially in the metropolitan cities, has left a gap between the desires and the actual of millennial generation. The figures are astounding and usually depressing.

Most of the young professionals making inputs of Rs. 8-15 LPA also simply can not afford to save Rs. 20-40 lakhs down payment, particularly when they are fighting high cost of living and student loan simultaneously. To make a matter worse, average rent in these cities is rising at rates of 8-10 percent per year, and at that rate, it is literally eating up whatever asset a person may be in a position to save. The rate of personal savings may not always be as high as the interest rate of property, so the goalpost is ever receding away.

The Failure of Traditional Advice

The old saying goes that everyone needs to save 50 percent of property value to use as a down payment. Based on this recommendation of a Rs. 80 lakh flat, it would take an average millennial 15-20 years of heavy saving. At that time, the property would have probably gone up to Rs. 2.5 crore. It’s a failed paradigm.

Other traditional alternatives are few:

• Parental Assistance: Not all parents have the capability and desire to give a multi-lakh interest free loan. When they do, it is usually conditional in terms of sentiment, or limitation.

• Government Schemes (E.g., PMAY): The schemes are usually good but the eligibility criteria are usually very high and more like a lottery system than a reliable financial planning.

• Migration to Tier-2 Cities: This is cheaper but in most cases, a big career sacrifice, which may be in terms of elevated salaries and improved career advancement that could be realized in the metros.

This is not a matter of saving more and it is rather a question of using the money of the bank and the rent of the tenant to jump start the process. This is where the house hacking comes in.

What is House Hacking in Indian Style?

Indian House Hacking is, essentially, an advanced weapon that takes charge of the financial responsibilities of home ownership off your hands to your tenant, as well as the government (through tax breaks).

The Core Concept:

• Purchase 2Bhk/3bhk Property with high LTV (home loan) of up to 90.

• The Live in One Room of the property could meet the criteria of the self-occupied loan status.

• Let the other room(s) be rented to a paying customer or tenant.

• The Tenant Rent accounts a big part or rather the biggest part of monthly EMI.

You end up living virtually free, and at the same time, you accumulate a lot of equity as well as you earn big tax deductions.

4 Strategy of House Hacking in India | House Hacking Models

Depending on your risk appetite, investment, and management effort preferred, you can choose the customisation of the strategy.

Model 1: Co-Living Strategy (The most popular)

Description A simple and widespread model. Buy a 2BHK or 3BHK in a metro city. You reside in the master bedroom, and you rent the other room/rooms to one working professional or student. You share some facilities such as the kitchen and the living room.

• Advantages: Low management, predictable revenue, least adopted.

• Entry Investment: Rs. 5-8 lakhs (down payment and incidentals).

Model 2: PG conversion (High Cash Flow)

Description :The description will be to purchase a large 3BHK or 4BHK apartment and transform it into an ordered Paying Guest (PG) apartment. It is usually renting 2-3 rooms separately and even including optional extras such as simple meals or laundry.

• Advantages: Extremely improved cash flow per square foot.

• Disadvantages: Labor intensive management, government obtaining of local permissions, increased wear and tear.

• Entry Investment: Rs. 8-12 lakhs.

Model 3: Work-Home Arrangement (New Trend)

Description: Purchase 2BHK and convert one of the rooms into a high-end, specialised home office. Lease this room to a telecommuting professional or freelancer to a high rent specifically on a WFH ready room.

• Advantages: It is able to attract a higher price rental when compared to a plain bedroom.

• Cons: Niche market, in need of finer furnishing and amenities.

• Entry Investment: Rs. 6-10 lakhs.

Model 4: Lower Investment (Joint Ownership Strategy).

Description: Purchase the home together with a friend, sibling and or a partner as a co-applicant. Both parties receive tax advantages in their entirety. You can divide the flat with each of you living in or renting one part.

• Advantages: Cuts in half the amount of cash up-front needed on a per-capita basis, increases loan and tax advantages twice.

• Cons: Must have a very high ability of relationship with the co-owner that is legally defined.

• Entry Investment: 3lakhs to 5lakhs (shared cost).

Low Investment for House Hacking in India

House Hacking HOME LOAN Strategy

The trick used in Indian House Hacking is that you need to get a high Loan-to-Value LTV loan and increase your eligibility with the rental income. You must put out of your mind like a homeowner, and begin to think like a wise real estate investor.

This Strategy will involve the best home loans counter.

Given that this is your first home purchase as a primary house, you are able to take the best interest rates and LTVs that are available in the market. The banks provide a maximum of 90 percent LTV on loans with the value of less than Rs. 30 lakhs and 80 percent LTV on loans with the value of greater than Rs. 75 lakhs.

The 10% Down Payment Formula in House Hacking

The greatest misunderstanding is the necessity of a 20 percent down-payment. The LTV ratio in most institutions is up to 90, which is equivalent to only having to deposit 10 percent of the market value of the property in form of a down payment. Nonetheless, other important aspects to consider are the large Stamp Duty and Registration fees, mandatory payments of cash as such.

Example of Rs. 70 Lakh Property in Pune:

This amount of Rs. 11.7 lakhs, however, is still big, which makes it look like this in terms of smart financial stacking:

• Personal Savings: Rs. 5-6 lakhs (Your core capital)

• Parents Gift: Rs. 3 lakhs (under Indian law Tax free to immediate family members)

• Personal Loan (Short-term): Rs. 2-3 lakhs (Borrowed to cover 12-18 months [to repay after getting tax returns/bonuses])

• Credit Card EMI: Rs. 50K-1L (Incidental e.g. furniture or processing charges)

Computation of Eligibility of the Loan

You are evaluated by the banks in terms of your Fixed Obligation to Income Ratio (FOIR). In most cases, they will enable you to have a total debt payments that comes up to about 40-50 percent of your net income.

Critical Rental Income Adversary

The most important in the hack: 50-70 percent of your projected rental revenue is how most banks do the computation of your loan worthiness! The reason why they do this is because they expect the anticipated rent as an additional source of income minimizing the risk of default.

Examples for Rental Income Boosting of Eligibility:

The effective income that the bank will take into account is Rs. 60000 to Rs. 74000 which can boost your loan eligibility of about Rs. 40L to Rs. 55L!

Paperwork Required to Indicate Rental Potential

• Draft Rental Agreement (with the anticipated rent indicated).

• Local property broker Market Rent Certificate.

• Report on property Valuation indicating potential in renting property.

Society Group Rules and Legal Observance

Never ignore the fine print. One provision will sink your whole plan. The critical checks that you have to do before finalising purchase are:

• Caution Box: There are cultures in suburban areas of Mumbai and Pune that do not allow renting to a bachelor or single woman and some societies in high-density areas have non-rental policies. The current bye-laws should always check before transfer of the token amount!

• Interaction: Have a personalized EMI Calculator which is automatically adjusted by the anticipated rental revenues to display to the customer an actual cash loss outlay.

TAX BENEFITS in House Hacking (MASSIVE SAVINGS)

Here house hacking will be a game-changer. There are three primary benefits which you can use in conjunction to take advantage of as defined in the Indian Income Tax Act making it possible to turn a high EMI into a low but tax improved cost.

Triple Tax Advantage Strategy: This type of retirement approach is provided by insurance companies.

Benefit 1: Principal Repayment (Section 80C)

Every financial year you can deduce up to Rs. 150000 of the principal amount you repay on your home loan.

• Outcome: Totally decreases your taxable income and you save up to Rs. 46,800 in taxes in the highest payment band.

Benefit 2: Title 24- Interest Deduction.
You can deduct the maximum of Rs. 2 lakh per annum interest paid on self occupied property (which you are considering, because you are living in that property) on your taxable income.

In the case of a let-out property (when you rent the whole flat or not the hack), you are allowed to claim the entire interest paid.

• The Hack: You have the key up since you are the main occupant and owner of the apartment, you have the Rs. 2 lakh benefit. During the early years of a loan, interest is high (e.g. Rs. 5-6 lakhs on a Rs. 60L loan), hence this is a significant saving.

Benefit 3: HRA Benefit (Provided Employed)

This is the legal loophole. In case you are a working employee, you can still take advantage of House Rent Allowance (HRA) exemption at the workplace.

• The Reason: You may be claiming on the HRA the accommodation you had, and you might claim to be entitled to it anyway, as you are paying only the nominal rent in comparison with having purchased the entire property, not to mention the tax advantages as you can have in owning a home loan. This certain interpretation entails intricacy filing of taxes.

Real Tax Saving Example:

We will consider the financial implications of an IT professional of Rs. 10 LPA Salary.

This is Rs. 1, 000,000 of your monthly out-of-pocket EMI deduction!

Joint Loan Equals Double Benefits

In case you choose to include a co-applicant (parent/spouse/sibling) who is an earning individual and you choose 3 (Joint Ownership):

• Double 80C Both are eligible to claim Rs. 1.5 lakh deduction under Section 80C (total Rs. 3 lakhs).

• DS24: Both may deduct under Section 24 24 [?]2 lakh [?]4 lakh] 24 [?]2 lakh.

• Total Tax benefit: 7 lakhs represents the maximum deduction that the family unit can claim on their joint taxable income resulting in gigantic savings.

Box in CA Recommendation: Before filing, consult a Chartered Accountant (CA). It is important to note that the documentation of the rental agreement, co-ownership arrangement, and percentage claim on tax benefits to avoid incurring legal liabilities and maximising on your savings.

Step-by-Step Guide to Roadmap for House Hacking in India

RoadMap for Indian House Hacking: This is a 6-month roadmap in order to implement successfully the strategy of the Indian House Hacking.

Month 1-2: Preparation
Step 1: Financial Assessment

• Check CIBIL Score: This should be 750 and above to get the best rates. It is free to be checked at CIBIL.com.

• Divide Debt-Income: Your current EMIs and that of the fresh EMI must not exceed 40-50 percent of the monthly net earnings.

• Save Core Capital: Save 5-10 lakhs required to make the down payment and incidentals.

• Immediate Debt: Pay out high interest debts such as credit card debt or personal loan.

Step 2: Pre-Approval

• Request pre-approval with 3-4 leading banks (SBI, HDFC, LIC HFL).

• Compare interest rates and they do consider all rental income in eligibility as well as processing fees and, above all, their degree of consideration.

• Get his/her approval in-principle letter to demonstrate to the sellers that you are not a joke.

• Bring the papers of the co-applicant (KYC, income documentation, CIBIL) so as to boost the loan limit.

Month 2-4: Property Search
Step 3: Location Choosing

You must have high rental demand and a low start-up price.

• Property Selection Checklist: Close to IT Parks/Offices: Guarantees an uninterrupted flow of working professionals tenant.

• Good Connectivity: Tenants cannot do with proximity to a metro station or a large bus line.

• 2BHK Minimum: The Co-Living Strategy has the minimal requirement of 2BHK.

• Ready-to-Move: It is better to avoid under-construction properties because of the twin liability of paying rent and EMI in the construction delays.

The 5 Percent Rental Yield Rule: To have the hack being effective, the property costs need to be at least 5 percent of the property rate. In your case Rs. 60 lakh property this is Rs. 3 lakh per annum or Rs. 25000/month total rent (including your tenant and your own rent saving).

Step 4: Property Verification

• RERA Registration: check whether the project is RERA compliant or not.

• Clear Title: If the title is dirty, then hire a lawyer to purge the title and remove the liens.

• Occupancy Certificate (OC): Necessary in order to occupy the property legally.

• Society NOC: Obtaining written assurance that society allows renting.

Month 4-5: Making Offer
Step 5: Negotiation Strategy

• Offer Low: Competitive: This can be defined as starting off at lower price than the asking price by a percentage of 8-12% of the asking price, particularly in case of ready to move flats.

• Cost Adjustment: Request the seller to absorb/adjust on the stamp duty/ registration charges.

• Timeline: Take over ownership within 45 days according to your schedule of loan disbursement.

• Postulate: Make the offer to be subject to the approval of the bank loan.

Step 6: Agreement Process

• Token Amount: Pay a little token (e.g. Rs. 10,000- 50,000) to block the property.

• Agreement to Sell (ATS): Sign the ATS (15-20 days later) and make the first 10% advance (out of savings).

• Issue of Loan Sanction: Collect the last loan sanction letter of the bank.

• Final Registry: Schedule the final registration of the property (30-45 days).

Month 5-6: Disbursement of Loan and Registration.
Step 7: Documentation

• Get ready the Sale Deed through a lawyer.

• Pay Stamp Duty: (5-7 per cent of property value) and Registration Fees (1-2 per cent). This has to be performed prior to registration of the Deed.

• Registration: Both of them sign the Sale Deed in the Sub-Registrar office.

• Bank Disbursement: This involves the transfer of loan to the seller by the bank.

• Property set up: Society transfer and membership application.

Step 8: Property Setup

• First Fixes: Basic repairs, cleaning and fresh painting of the property are important in attracting good tenants.

• Furnishing: Purchase basic and long lived furnished items (beds, wardrobe, simple kitchen) in the rental room (budget Rs. 50K-1L).

Month 6+: Tenant Management
Step 9: Finding Tenants

You require rapid less expensive tenant acquisition.

• Listing locations: NoBroker (zero brokerage), Creativity Direct (Facebook group), official company bulletin boards.

Screening (Critical!):

• Police Check: It is a compulsory one in most cities.

• ID documents of government and company.

• Previous landlord recommendation.

• 2-month security deposit.

Red Flags to watch: A high frequency of job switching, dislike of sharing company identification, insisting on a cash transaction.

Step 10: Legal Documentation

• 11-Month Agreement: This saves high cost and effort required in mandatory registration of 12-month and above leases.

• Vitalities: The date of payment (e.g. 5 th in each month), period of 2 months of notice before termination, conditions of security deposit, maintenance clause.

• Government Portal: Have to have the rent agreement registered on the state government portal on the internet (e.g., in Maharashtra).

COMMON MISTAKES & RISKS

House Hacking is an effective strategy, but it should be worked hard. One erroneous decision can make any investment into a nightmare.

Top 5 Mistakes Indians Make

Real Risks & Mitigation

Risk 1: Society Objections

• The Problem: Other occupants could disapprove of your co-tenants, which will result in the fact that they will complain about your noise or guest standards.

• Mitigation: Select even-tempered, silent professionals and pre-empt them on society rules.

Risk 2: Tenant Default

• The Problem: The tenant defaults the payment of rent.

• Mitigation: Demand security deposit of 3 months. Carry out occasional, incognito reviews of their status in line of employment.

Risk 3: Property Maintenance

• The Problem: Surprising costly repairs such plumbing, electrical or leakage.

• Mitigation: Reserves Rs. 50K-1L of annual maintenance funds with reserve on repairs of non-society.

Risk 4: EMI Burden Vacancy

• The Problem: When you leave, you are paying the full EMI of Rs. 45,000-60,000 until you come across someone.

• Mitigation: 2 months before the expiry of the lease of the existing tenant, initiate the search of the next tenant.

Honest Assessment

House Hacking is not a silver bullet. The initial two years entail some form of compromise, that is, sharing your space, tenants, and sometimes politics in society. But having to make that tradeoff, you can afford a valuable and appreciating asset in the most expensive cities in India as your counterparts are just making rents.

Invest in the process, stick with the process, and in a couple of years equity that you establish will enable you to purchase the second and non shared home that you always desired and transfer yourself into a real estate investor.