Archives for March 2016

About 12 years back, I first came to Bangalore to join my first job in IT industry. Known as city of lakes and the silicon valley of India, Bangalore was the place to be in.

However, the initial euphoria soon evaporated when I was told by the real estate agent that renting a house required me to deposit an advance. What added insult to the injury was the size of security deposit amount. It was supposed to be 10 months of rent.

Holy cow! That was several times more than my monthly salary at that time.

But it turned out that the practice was pretty common in Bangalore, and still is, which I suppose is not the case in other metros.

It infuriated me that the house owner would conveniently put that advance money in his bank and pocket the interest income too. So in effect he wasn’t just making money from rent, but from free deposit also.

Now here is an interesting question to puzzle over. The security deposit which in effect was a borrowing for the house owner – can we call that money as debt for him?

Yes and No. ‘Yes’ because it’s not his money and he would have to return that money sometime in future and ‘No’ because he doesn’t have to pay any interest on this borrowing.

So it’s a debt but quite different from a traditional debt. Let’s see how.

When I moved out from his house, the money which he returned to me was replenished by the new tenant. So it was a revolving fund. Effectively he would never have to return that money to his tenant, provided he doesn’t run out of tenants, which is unlikely because his house was in busy locality in Bangalore.

The deposit was an income generating asset which costed the landlord nothing. He could very well be using that money for making other investments too, like buying stocks or making down payment for another house.

So this is a very interesting type of debt. It’s called Float.

[Read more…] about Latticework of Mental Models: Float