A majority of second home buyers purchase luxury homes outside city boundaries to stay away from overcrowded areas and congested spaces to relax and unwind. There has been an immense growth in the demand for second homes. There are different perspectives of a home buyer for the purchase; either it is a second home that represents a post-retirement recreation option, or the opportunity for rental income. However, second homes are also viewed as a long-term investment option.
A huge number of second home buyers’ investment ranges from Rs 40-80 lakh, with houses in the premium segment. Earlier, buyers bought the property from an investment point of view and kept the houses vacant for most part of the year. The return on their investments came only when property prices increased, over many years. However, with changing times, a lot of people have started giving their houses on rent. While the capital value of the second home will appreciate over time, it can also generate money in the form of rentals, which not only takes care of the maintenance costs but also adds to one’s savings. Moreover, this allows the investor to have a diversified investment portfolio.
Factors that will impact your second home investment:
1. Entry-level price and rental yields
The profit on a second home will depend on the segment, location and the probability of renting out the unit. There have been instances, where renting happens regularly and with a good amount as rental. However, if the entry price (the cost of buying the unit) is high, it impacts the return on investment (ROI). Similarly, buying a second home in a location where the cost of the unit is lower may also entail less frequent renting and lower rentals. So, making an intelligent decision while buying a second home unit is all about buying where price-points are not too expensive.
2. Income tax laws
The maximum deduction on interest is now capped at Rs 2 lakh, against the entire interest that was tax-free earlier, even though there is a provision to carry forward the losses in eight consecutive financial years. Even with this carry forward facility, it will still be a loss-making venture, for those trying to buy a second home with loans, because the interest on loans, as well as on rental income, will become taxable. The smart way out would be to check one’s investment portfolio and plan one’s finances in a manner that permits the enjoyment of benefits of a second home, without burning cash or making losses.
3. Infrastructure development
However, finding the right balance may not be easy, especially when there are so many factors that can affect prices and the property market’s economy. Some of the factors that one should consider are population growth, affordable pricing, location and infrastructure development. Generally, higher rentals can be expected near educational zones and corporate hubs.
4. Purpose of buying the home
It is very important to identify a good place for investment. Most importantly, a buyer must be clear about the purpose of buying a second home. It is always a good idea to consult with one’s friends and family, before taking the final decision. Consider investing in a property that is situated in a fast-developing locality, rather than investing in an already developed place, as a place that has already reached its saturation may not provide high returns.
To avoid the risk factors while buying a second home, here are some basic segment points to be considered:
1. Check the credibility of the builder.
2. Arrangement for finance, if the first home is also taken on a loan.
3. Ascertain the cost of the maintenance and municipal taxes, payable on the second home.
4. Check out the income tax implications.
(By Amit Wadhwani, Director, SAI Estate Consultants)