Points to consider, before buying a second home

[ecis2016.org] Even a ‘small’ investment in real estate, can often mean lakhs of rupees and the added financial pressure from buying a second house can often be overwhelming. We look at some dos and don’ts for buying a second home

As stock markets around the world take a beating, owing to the Coronavirus pandemic, investors’ opinion is seen tilting in favour of immovable assets. According to the findings of a joint survey by ecis2016.org and industry body NAREDCO, 35% of over 3,000 participants voted for real estate as the best investment class. On the other hand, only 16% said they preferred stock markets.

You are reading: Points to consider, before buying a second home

While first-time buyers will continue to dominate the market in this scenario, owing to the overwhelming demand for housing, the demand for second homes could also rise, in the backdrop of the pandemic. As social distancing becomes the order of the day, people are actively looking for second homes/ vacation properties in affordable markets in the suburbs. However, buyers must take certain basic precautions, to ensure that the investment does not turn unprofitable.

Take a home loan

Buyers who cannot pay outright for the purchase of a second home, should consider a home loan. The COVID-19 crisis has brought interest rates to a record low level. Public lender SBI, for example, is offering housing loans for 6.65% per annum, after the RBI reduced the repo rate to 4%. As deposit rates are currently low (between 4% and 5%) it does not make sense to keep the cash in fixed or recurring deposits, especially in light of the fact that you will have to pay tax on your earnings. In case of housing loans, buyers could save up to Rs 7 lakhs in taxes, on the purchase of their second home, if the loan is taken in joint names.

Look for ready homes

Even though construction work has resumed across India, within the boundaries of social distancing norms, housing projects are likely to see delays, because of the unavailability of labour, owing to the reverse migration of construction workers. In such a scenario, investing in an under-construction property might not be ideal, even if you are choosing a credible developer brand. Since there is no dearth of ready-to-move-in options, these should be a buyer’s first choice, for the purchase of their second home, if their financial position allows them to invest in a ready property, which would invariably be costlier than an under-construction property.

Choose a home in the suburbs

Of the over 7.38 lakh housing units that are lying unsold across India’s nine prime residential markets, a majority are located in the cities’ suburbs. If the distance of these locations from the city centre was viewed as a flaw earlier, the same thing is now being looked at as their key trait, especially since social distancing is going to be an integral part of our lives. Fortunately for the buyers, developers are currently under tremendous pressure to sell off their existing stock and hence, they may be willing to cut a sweeter deal, if you can negotiate intelligently.

As the demand for rental homes in these areas may also witness a spike, your investment can help you generate a rental income, as well.

8 things to know before buying a second/vacation home

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By A Resident Blogger: Thinking of buying a second home, but worried about the down payment? Losing sleep over the additional loan, and trying to evaluate the soundness of the investment? We’ve got some great tips to get you through this. Buying your second home may be easier than you think!

1. Farmhouse (vacation home) or city apartment? Decide what kind of second home you want to buy

Do you want your new property to be an investment or a home away from home? The location of this second house will also affect the price tag, so choose wisely! A holiday home would be great if it is a quiet farmhouse on the outskirts of your city, a cosy nook in a calm place like Pondicherry, or an eco-friendly wood house in a hill-station; while an apartment that you can rent year-round in a city location with convenient facilities close by would be a better investment from the rent/income perspective.

Tip 1: Vacation homes can also double up as income generators in the form of home-stays or short-term rentals. Don’t forget to explore this option, if your idea is to derive some return on investment.  

Tip 2: Share holiday homes with someone you trust – perhaps a friend or family member. This way each of you only has to pay half the cost of the property, reducing your savings goal substantially. No matter how well you know them, it puts less strain on your relationship to form a legal document that spells out how the sharing works (who gets the house and when.)

[ecis2016.org] What is a farm house ?

2. Budget, budget, budget! How to save for your dream vacation/holiday home!

Now that you’ve decided on what you want, begin the penny pinching. Monthly budgeting is the best way to begin. Start with a simple excel sheet to track all your expenses – rent, food, transport, treats and so on. Assign an overall percentage to each of these items to see where you are spending more or less, what is required and what isn’t. Target the top 3-4 most expensive items on your list and focus on how you can save here..  It can be easy to lose track of your spending, so rather than waiting until the end of the month, start right at the beginning.

Tip: Once the budget is set, do a dry run to see if you can manage the EMI expenses of the property sufficiently. Apart from helping you plan for your second home, this exercise will help understand if you can afford it.

3. Minimise on the luxuries

This is an important step that will probably take you further on your path to a second home loan than you might think. All those little luxuries add up, and if you were to control them, you’d realise how much quicker you could hit your savings goal. Find a balance between cutting them out completely and overspending – make a fancy meal at home rather than eating out at an expensive restaurant every week. Instead of burning money on fuel, carpool with colleagues. Make a list of your monthly expenditure and look for expenses that can be minimised.

Tip: Besides cutting down on luxuries, you can also think about using your second home to finance your second home! If the rentability is high in the area where you intend to purchase your second home, then you can factor in the revenue (minus the taxes on income + tax benefit on second home loan) and use it to pay the EMIs on your second home loan. 🙂

4. Treat yourself

Keeping the purse strings too tightly closed can backfire – you snap and make expensive, impulsive purchases. Rather than driving yourself crazy by denying yourself your every luxury, make a plan to treat yourself every few months. Set yourself a savings goal every quarter, and once this is met, treat yourself to a day at the spa or that nice mini-vacation you’ve always wanted. This reward program will make those months of saving for a holiday home easier as the months go by.

Tip: Keep an eye out for deals and discounts – plenty of travel sites offer great coupons and off-season travel can be your best friend. You get to enjoy the sights without the teeming tourists. Choosing less expensive, homely hotels or even home-stays can give you big savings.

5. Consider alternative financing methods

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It is claimed that over 99% of all businesses receive their initial funding through family and friends, and the trend is catching up in the housing sector as well. If your family and friends are willing, this would be interest-free and would save you huge sums. This route needs careful thought – pick someone who is in a position to help you out so you don’t put them in a tight spot.

Tip: Going through legal channels to decide the terms of payments will reduce any ambiguity, and is a good idea for both parties.

6. Get the taxman to pay for your second home

Apart from borrowing, saving can be a form of alternative finance as well. A tax benefit on a second home loan is given on the interest part of the amount that you pay for a fully constructed house; or 20% of the total interest paid before construction began is also allowed as tax deduction while construction is not yet complete. Since the law considers your second home to be rented out, and therefore eligible for income tax, these need to be factored in your budgets.

7. Increase your down-payment, if possible

Next, when you think you’re ready to make the big leap and buy that second property, it may be a good idea for you to pay a larger down payment on your second property than the standard. If you pay a larger sum upfront, say 30-35%, you will reduce the housing loan you’ll need to take out, thus saving yourself thousands of rupees in interest. This would allow you to finish paying off your loan faster and reduce the stress that comes with a large loan.

Tip: Buying a house (whether primary or a second one) can give you tax breaks. Don’t forget to feature the tax benefit on second home loan on-to your budget. Your next dream home may look easier to afford, in such a case.

8. Things to avoid doing

While buying a second home could be a major investment down the line, remember not to take out a loan against your primary residence. This could spell disaster for you if some unforeseen financial reversal were to take place. You might end up losing both homes. Also, consider just how much this second home is going to cost you.

Tip: Consider the added costs of owning another property, such as property tax, insurance, and additional fitments.

The bottom line

Saving for your new property doesn’t have to be about deprivation and anxiety, all it takes is some careful planning. A little forethought before you begin this journey will reduce all your tension and worry over loan repayments in the long run; and every time you check your house fund and see those numbers growing, it will motivate you to keep going!

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Category: Lifestyle