While you are privileged enough to buy a second home, let’s first look at some of the pros of having a second home.
1. Source of passive income
Renting or leasing out your second home can be a great source of passive income for you. The obvious benefit of earning an additional income out of your second home can be utilised for paying monthly home loan EMI (if the home is bought on a home loan) or for part-payment of loan or other investments. Depending on the demand in the market, real estate value appreciations, rent would also increase resulting in increased income for you.
2. Investment for your retirement
Along with an additional source of income, a second home can be a great investment option for your long-term goals like retirement or for achieving similar milestones in the future. As real estate investments are believed to deliver good inflation-adjusted returns over a longer period, investing in a second home would turn out to be a profitable and worthy option for retirement. Adding up an asset and liquidating the same at a higher price later in your life can help in wealth creation.
3. Benefit of taxation
Along with the tax benefits on your self-occupied property, you can also avail tax benefits from your let-out property or a second home, when you apply for a home loan. Now that two houses* can be claimed as ‘self-occupied properties’, tax deduction can be claimed under Section 80C for the principal home loan repayments and under Section 24B for interest paid towards the home loan. A tax deduction can be claimed up to INR 2 lakhs (overall) under Section 24B of the Income Tax Act. However, it is important to note that the rental income earned on your second home is taxable.
* From the Budget 2019, the law mandates that a maximum of two properties can be considered as “self-occupied” and the third one would be considered rented even if it is not.
As every investment option comes with certain cons, buying a second home as an investment can have certain cons. Let’s look at them.
1. Uncertainty in rental yield
When you let out your second home, you may face the risk of lower rental yield, difficulty in finding the tenant along with bearing the maintenance cost of vacant property, etc. When the rental yield is uncertain, it can hit your savings part also as the home loan EMI takes a huge portion of your stable income.
2. Illiquid nature of investment
If you have to quickly liquidate your investment to meet the emergency financial requirement, investment in a house property may not be a great option. You may not find a buyer at the right time to meet the need or you may need to liquidate it at a considerably lower price. Tackling an emergency could get difficult with an investment in an immovable asset.
Here are few things to consider while buying a second home for investment purposes
1. Consider your debt obligations
With the global health crisis, home loan interest rates have drastically reduced. With your additional money available to make a larger down payment, a home loan can be a great option to buy your second home, which also gives your tax benefit to enjoy. It is also important to consider your other debt obligations, emergency funds while investing in a second home.
2. Plan your monthly expenses
As a substantial amount goes for home loan EMI, it is also important to plan your monthly expenses along with buying a home in the right locality to earn a good rental yield.
Though buying a second home is not as tough as buying a first home, it needs careful planning. When you apply for a Home Loan , you do get tax benefits. However, you need to consider the cost involved in buying a second home, real estate appreciation, and the taxes, then weigh your investment decision. You can consider the Home Saver option to save the interest component such that you pay an interest only on the amount utilised and not the entire amount!