For many, a second home is a noteworthy consideration as real estate is assumed a “safe-haven” for investment. Some see it as a part of their inflated net worth or as a source of alternative income and for some it just satisfies their eyes to have a physical asset. All in all, owning a second home is equated to image constructing, financial security & confidence. Some pros include:
1) Savings in Taxes
For the higher middle or the higher income level group, second home becomes a way to increase their in hand income through tax savings from the EMI’s paid for the loan. It helps them claim benefit under Section 80 C for the principal repaid for the home as well as the interest paid towards the loan under section 24 B.
2) Source of Secondary Income
Following the tax-saving feature of multiple properties, they are seen as a source of alternative income through rents/lease. The amount received through rent covers up for the actual price of the property over a period of time. This way, after saving taxes on the net take-home, renting a second home covers up for the EMI paid for the property. Also, an increase in rent over the years leads to additional savings over and above the actual investment.
3) Investment for Future Needs
For most of us, real estate serves as a ready finance for after- retirement life, child’s education, marriage etc. The value of appreciation in the property prices is expected to cover the inflation and the fund requirement for the long term Financial Goals.
But deciding to buy a home is not a simple decision as it involves huge capital outflow as well as long term commitment of repayment which is viewed as liability. While pros are aplenty, there are also some cons that cannot be overlooked while contemplating on a second home.
1) Savings take a backseat
Savings of a person takes a backseat when commitment to EMI (Equated Monthly Installment) comes to the fore. To accommodate such regular commitment, one has to go through a lot of lifestyle adjustments. As EMIs remain constant, an individual’s finances are vulnerable to emergencies which can arise from Job loss or ill health.
Real estate is tough to liquidate. It requires loads of time and attention if one has to resell it. Also, the risk of not being able to sell such asset during emergency could be a major consideration to mull over. A hasty decision on selling property may lead to improper negotiation and bad deal resulting in loss of money.
3) Tax Savings or Planning
Home Loan repayments do provide tax-savings up to INR 1.5 Lakhs under Section 80 C but such tax-savings can also take place through PF (Provident Fund) contribution, Insurance, Child’s education etc. Another important aspect of Home loan payments is the tax benefit one gets on the interest portion in the initial years when the interest forms a large chunk of the EMI. This benefit is directly proportional to the interest amount paid. Therefore, as interest amount reduces, so does the benefit. While this takes place, a person’s income also increases over a period of time. Then the intention of saving tax on net-take home is no more a clever option. Therefore, we must know that tax-benefit is effective for limited time only.
4) Other Associated Risks
We always ignore the other risks associated buying a second home
- Property vacant for long time. No suitable tenant for the home.
- Lower rental yield
- Maintenance cost may deplete the income from the second property.
Matters of heart and of personal finance require time & attention and must not be rushed. What may seem an easy option in the beginning may lead one to financial misery if a thorough due diligence is not performed. So, if you need help or an affirmation on your financial capacity to decide on a second home, talk to your personal Financial Advisor.