JOIN USGone are the days when second home buys were luxuries of the elite few. Today, having a second home is increasing among the High-Net Worth Individuals (HNI), who have a high disposable income and plenty of opportunities to invest all around them.
A large portion of the HNI are formed by the young brigade, thanks to the boom of startups, technology and skill-based companies. With negligible financial responsibilities and increased awareness, investing early and right is the mantra.
Buying second homes is one of the best options for early investment and efficient tax management as well. But before jumping the gun, make sure it is a decision that has been well thought out and analysed carefully. While real estate has been giving stupendous returns for the past 50 years, there are many long-term implications of investments to be considered.
Things to consider
Before you invest in a second home, here are some of the things that you need to keep in mind:
l See if a second home really fits in your financial plan. The immediate desire to invest owing to a good pay package may be luring, but not before you have
accounted all future expenses related to the cost of maintaining two properties, debt-to-income ratio, other existing EMIs, contingencies for emergencies and
inflation in the economy.
l Fix a budget for your second home,depending on your financial responsibilities and future plans. Investing in second homes is not merely about parking some extra money in a property and letting it escalate. One will have to
incur expenses like stamp duty, registration, insurance during time of purchase and later on, maintenance charges, interest on loan, property tax and any other recurring expenses.
l Are you purchasing a second home for investment purposes or for personal use? For both, location of the property would play a critical role. If it is for investment, make sure the property is ideal in terms of capital appreciation and rental yields. Easy accessibility, scope of development and prime location would attract best rates during reselling or rental deals. But do keep in mind, income from rent is taxable. If the purpose is for personal stay, like a post-retirement plan or holiday getaway, a home in the high hills or against the beach would make more sense.
l Consider how you would be financing the property. Bank loan terms for second home would vary from those for first homes and may not even be attractive enough. Usually, banks finance up to 75-80 per cent of the value. However, if your first home is already on loan or you carry any other loan like a car loan or personal loan, your eligibility will depend on a stellar credit history and reliable income statements.
Taking a join loan with spouse can be a better way to go about it. Investing in
second homes also provide tax hedge and the interest on loans can be offset by rents. Study the interest rates, down payment plus repayment terms and other strings attached with the loan before going ahead.
Thorough research
Like any real estate investment, studying the property is critical when it comes to second homes too. A thorough research on the developer, the type of structure and quality of construction, legal permissions and licenses from authorities, design and layout is highly advisable. Apart from this, understanding the area of the property, the local people and weather conditions or threats can help in the longer run.
With rising opportunities in the real estate market and developers offering attractive deals to do away with an outstanding inventory, investing in second homes should be a sound decision. For the opportunist investor and those with a good job security, there is no time like now!
(The author is executive director, Housing.com)