How to make the most of a second home investment

A large number of second home buyers purchase luxury homes that provide them with a retreat away from the city, where they can relax and rejuvenate. According to Sunil Sharma, VP – marketing and CRM, Mahindra Lifespaces Developers Ltd, the growing population of high net worth individuals (HNIs), has spurred the demand for second homes. “For some, a second home represents a post-retirement recreation option, or the opportunity to pursue one’s hobbies and interests. However, second homes are also increasingly viewed as a long-term investment option, with rental income and capital appreciation,” says Sharma.

However, recent changes in tax laws, in financial year 2017-18, have changed the home buyers’ outlook towards investing in second homes. One main reason, is that the deduction of Rs two lakhs, available on home loan interest, is now the same, for both, rented and self-occupied property. Moreover, the loss on house property that can be reduced from ‘income from other sources’, is confined to Rs two lakhs only. As a result, many salaried employees and businessmen, who sought second homes so that they could reduce their tax liability, are now looking for other means to earn returns.

Should one buy a second home for investment/rental income?

Most second home investments range in a ticket size of Rs 40-80 lakhs, 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,” says Amit Wadhwani, director, Sai Estate Consultants . 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.

Rohit Poddar, managing director, Poddar Housing and Development Ltd , explains that “Rental income yields on residential property, are typically three per cent, depending on the market and can go up to five per cent, if one buys an under-construction property. This alone may not be a sufficient reason to buy. So, one should buy only if there is an expectation of capital appreciation, as well.” Wadhwani adds that the new laws and policies brought in by the government, have also eased the entire process for buyers. “With RERA and GST coming into the picture, investing in second homes for rental income, will increasingly become trend,” he maintains.

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, the 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 and rental incomes are,” explains Niranjan Hiranandani, Co-founder Hiranandani Group and national president, NAREDCO.

Aniket Haware, managing director, Haware Builders, points out that “Most home buyers buy second homes, purely for investment purposes, or as a holiday home (near tourist places), or for earning rentals in cities. In the last case, one should invest in the second home, only if the rental returns are high in the area.”

2. Income tax laws

“The maximum deduction on interest, is now capped at Rs two lakhs, 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,” advises Ashwinder Raj Singh, CEO, Anarock Property Consultants.

3. Infrastructure development

However, finding the right balance may not be easy, especially when there are so many factors that can affect prices and 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.

Purpose of buying the home

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, advises Vijay B Pawar, founder and director, Mirador Dewellers Pvt Ltd. “First, identify a few good places to invest in. 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,” Pawar concludes.

What you should check, before buying

• Check the credibility of the builder.
• Consider how to arrange for finance, if the first home is also taken on a loan?
• Focus on location, unit size and infrastructure.
• Ascertain the cost of the maintenance and municipal taxes, payable on the second home.
• Check out the income tax implications.