How to Construct a House for Free? (Pay Cost of Land Only)

Introduction

In this article, I am going to discuss a plan as to how you can finance the construction cost of a medium-size house, provided you already own the land on which you are going to construct it. This is a long-term undertaking and its success hinges on how skillfully you can leverage the power of equities (stocks or shares). Let’s, first of all, list down the pre-requisites, some basic assumptions, and then we can go on to the execution part.

Pre-requisites

You have already purchased the land.
You have the money required for consctruction of the house.
You have a fair knowledge about the stock market.
You are ready to execute this plan over a span of about 25 years.
You are eligible and ready to get a house construction loan.
You have about 10-20% extra cash to cater for any unforseen situations.

Assumptions

For this plan to work, I am making some safe and realistic assumptions, however, you can see how these are relevant and applicable to your local market conditions.

The land for the house was bought for 10 million (Name of the currency has been omitted. You may assume any currency).
The approximate construction cost is going to be 15 million (you already have this money in the bank).
You are getting a housing loan of 15 million which you are going to return in 25 years. In total, you will return 30 million to the bank, due to the mark up, in terms of 300 (25×12=300) EMIs (equated monthly instalments).
From your stock market, you can prepare a shortlist of companies that offer minimum 8% dividend yield (post tax) per annum.

Disclaimer: If you do not fulfill the pre-requisites mentioned above or the assumptions given are not valid for your market, the plan is not going to work.

Execution

Now we are going to discuss, step by step, how this plan should be executed.

Invest 15 Million in the Stock Market

As a first step, invest the money, you had set aside for construction of the house, in the stock market. In doing so, keep the following in mind:

Although there are many styles and strategies of investing in the stock market but this is going to be purely dividend centric investment in order to ensure a stable and regular income without any hiccups.
Prepare a shortlist of some 10-12 high dividend yield stocks from across various sectors. Choose only those companies which have atleast 10 years track record of paying dividends regularly. Remain above 8% divedend yield (post tax), in aggregate.
Start buying these companies in small chunks at regular intervals according to a pre-defined plan/ schedule. Don’t attempt to time the market. You should be able to complete your buying in 6-12 months. The purpose of this buying style is to achieve the best time deversification (vertical diversification). This is in addition to the horizontal diversification you are getting by investing in a number of companies from various sectors of the economy.
On completion of this buying exercise, you would have invested 15 million in various companies. This investment will start returning you dividends shortly. The frequency of paying dividends by the companies can be quarterly, half yearly or yearly. However, the dividend yield is calculated on yearly basis.
From this investment, you should expect approximately 1.2 million every year. This money will be used to pay EMIs of your housing loan.

Start Pre-construction Formalities

While you are gradually investing your money in the stock market, you should start working on the following:

Finalize the design and associated plans and maps of your house.
Seek various NOCs and approvals.
Apply for electricity, gas and water connections.
Engage with the companies, contractors for construction of the house.
Carry out market survey for the construction material.

Apply for the Housing Loan

Select the bank carefully as it is going to be a long-term engagement. Be conversant with the associated rules. Submit your loan application while keeping the bank processing time in mind. Desirably, you should get the loan money in your bank account by the time you finalize various pre-construction formalities and your investment in the stock market is complete.

Carry out Construction of Your House

It may take you 8-10 months to complete the construction and you should be able to shift to your new house within a year.

Start Paying Back the Loan to the Bank

You will start receiving dividends in the bank account that you have linked with your equity trading account. It will be ideal if you can pay your EMIs from the same account automatically. You have already structured it in a manner that whatever you have to pay in terms of EMIs is being received in the shape of dividends in the same account. In all probability, this should go on smoothly for 25 years while you enjoy your life with family in your new house.

How to Utilize the Money Kept for Unforeseen Situations?

You have kept some money (10-20% or 1.5 to 3 million) for unforeseen situations.

Firstly, what could be those unforeseen situations, and secondly, how to deal with them?

Your EMI might be revised upwards due to the fluctuations of the debt market. There may be some drop in the dividend income from the stock market. These are the only two possible negative developments.

There are three ways of how you can utilize your reserve money to deal with these unforeseen possibilities:

Keep the money in the same account from where you are paying the EMIs and use this money to finance the difference.
Keep this money in a good debt fund to earn profit which should be trasferred to the account from where you are paying the EMIs.
Invest it in the stock market, in line with the strategy already mentioned, to earn more dividend income which can be used for the same purpose mentioned above.
My personal preference is to invest 50% in the stock market and 50% in the debt fund.

What Should be a Fair Expectation at the End of 25 Years

Your housing loan would have been paid off, in full.
The value of your house on which you invested 10 million (cost of land only) should have appreciated to a market value of 270 million. How have I calculated this? Take 25 million as the initial value, because this is the total cost of the house (land plus construction), take 10% as compounded annual growth rate and a 25 years period. Do this calculation with the help of a CAGR calculator and you will get the final value as 270 million. 10% CAGR for properties is fairly realistic.
You also own an equity portfolio where you invested 15 million, primarily to pay your EMIs. Where does it stand now? Roughly, you have been taking out 8% from it every year (the dividend income). Let’s assume that your portfolio grew at 14% CAGR for 25 years (this is a fair expectation). Since you have been taking out around 8% every year, so put in 6% only in the CAGR calculator and what you get is 64 million. Therefore, your equity portfolio is worth aound 64 million now. Since your loan is paid off, now you have a choice to reinvest your dividends either in the same stocks or you can tweak your investment strategy a bit and can now target some other investment themes like growth and value etc because some of the freedom with regard to your portfolio has been restored, after paying off the housing loan.
Nothing can be said, with any degree of certainty, about the 1.5 to 3 million amount that you had kept as reserve money for unforseen situations. It might have either been consumed by the fluctuations in the market but if you were lucky, it might still be there. Its present value depends on where you kept it.
Another fair expectation would be dividends growth as a function of earnings growth. If you had invested in good businesses and had kept a careful eye on how these businesses were progressing with a view to make any adjustments if needed, expansion and growth in the earnings is very likely. Inevitably, this would have resulted in dividends growth. Since your buying price was locked as you had bought once and kept them, your dividend yield now would definitiely be in excess of 8%!

Summing Up

Before concluding, let me quickly sum up what you started with and where you stand now. You started with 25 million i.e. a piece of land worth 10 million and 15 million in cash. After 25 years, what you have is listed below:

A house with a market value of 270 million.
An equity portfolio worth 64 million.
No liabilities.
At 8% rate of inflation, what would have been eaten up by inflatioin comes to 171 million, so in real terms, you have a house and an equity portfolio with a combined worth of 163 million approximately and a very rich experience of equity investing!

Conclusion

Equity investing is extremely powerful when it is afforded enough time because it gives you an opportunity to associate with good businesses that create wealth and distribute it to the shareholders on an equitable basis. If you learn to allocate capital smartly and take a long-term view, you can accomplish more with limited financial resources.

How did you find this content? Please comment and give suggestions, if you have any.

My other articles you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

Retirement Planning

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?