Things to Keep in Mind While Buying a Second Home

Real estate has always been a worthier and fruitful investment avenue, less volatile to market conditions. With the pandemic at hand, business dynamics have shifted. The outbreak of Covid has inspired homebuyers, fence-sitters and millennials to buy a house for themselves, due to consecutive reforms and measures announced by the government to remobilise the economy. Historic measures like reduction in stamp duty, premiums for real estate, and reducing home loan rates has encouraged these new-age home buyers to invest in residential space.

Areas in and around Mumbai, including Thane, Kalyan, Badlapur in the central district of Mumbai, Andheri, Malad, Kandivali, Vasai-Virar in the western district, and Panvel, Vashi and Navi Mumbai can be considered prime locations for investment or occupancy.

Buying a second home in the city or suburban areas is a good investment idea considering it can help generate a decent rental income. Keeping in mind the current scenario, the key source of income is being affected due to the pandemic for many. Real estate offers the prospect of earning a second income. Dividends from stocks offer short-term revenue. Short-term rental income is generated by real estate. Rental income, on the other hand, is much more stable than dividend income. Stocks and real estate both face capital appreciation over time. Stocks will increase in value more quickly. In the long run, real estate offers a slower but more consistent rate of capital appreciation. Inflation can be dodged by a combination of rental income and value appreciation. Second homes can also provide a larger return, in case the home owner decides to sell it for funds to manage accounts in such uncertain times. As resale continues to contribute significantly, making a positive avid impact on the health of the real estate sector, it will not affect new launches and ready-to-move-in properties. It will only create a new segment of buyers who previously were not interested, as the demand for housing and amenities has been redefined in this pandemic. The customers who have their eyes set on buying homes in a new project or are ready to move in will continue to move in the same direction because of the presence and emerging demand for essential services in the vicinity.

Second home buyers/investors should always keep a few things in mind before they start their passive income journey.

Establish and determine your reasons to invest in a second home

The touchstone for analysing the need for a home highly depends on whether you plan to use it as an investment or for self-occupation. One should have clarity for what way this investment will fit into their overall portfolio. In the beginning, the returns can be typically low and this only gets better with time as the rental income and value increase overtime. For instance, investing in Badlapur, a central suburban area of Mumbai, for a second home can potentially give up to 75x returns by 2030. Hence, basic due diligence is a must before investing money in second home.

Evaluate your Budget

To ensure that the second home doesn’t hamper the financial aspect of any home-buyer, one should analyse the overall capital value at hand and a pre-defined, well-calculated budget for second home. The process is similar to buying the first house where buyers would have to incur acquisition costs like mortgage payments, taxes, maintenance and insurance expenditure. Thus, it is a good idea to finalise a budget and shortlist homes based on that.

Pay more attention to the location and the type of house

Location is one of the most integral aspects to focus on when it comes to real estate investment. If you are purchasing your second home as a mere investment, an appreciable location with proximity to a sizeable number of facilities and avenues for entertainment can skyrocket the demand for your home. The location can aid you to measure the property’s appreciation potential.  You can also buy your second home as a getaway or retirement home and for this, a villa or a row house in a peaceful, quiet area would be ideal. Since metro areas are becoming too congested, the development in the Mumbai Metropolitan Region (MMR) especially areas around Kalyan, Badlapur are seeing a constant rise in demand for well-spaced houses.

The Return on Investment

While purchasing a second house, one of the major factors you need to keep in mind is the potential return on investment (ROI) from the property. Usually, homes around commercial areas provide a higher ROI than homes in secluded areas. Investing in a property with a high return on investment will consequently provide higher long-term returns. Keeping this in mind, it is a good idea to invest in fast-appreciating localities where the investment is not as high as the well-established neighbourhoods. Additionally, there is more scope for appreciation over the years.

The Tax Benefits

You should also remember to track out the tax benefits available on the second house. You may reduce your total taxable income by claiming the full interest paid as an expense from the rental income, besides the standard deduction for maintenance expenses. Over time, as the yield improves, the house will turn into an appreciating asset, which can generate an inflation-adjusted income that you can use to fund your goals.

The author is Managing Director, Poddar Housing and Development Ltd

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.