Investment in a second home is an effective way to build wealth in the loan term especially for salaried individuals
Most people with investable surpluses tend to
stay focused on the financial markets, whether it is debt or equity.
Very few venture into real assets such as Gold or real estate. An
investment in a second home is an effective way to build wealth in the
loan term. Let’s examine the various reasons why this could even be the
best form of investing for a salaried individual.
Real estate outlook
Real estate prices in India have grown at between 15% and 20% annually, over the past 50 years, across cities and across various reasonably long (10 year) time frames. Over a long term this growth is projected to continue, given the combination of various enabling factors. These enabling factors include a favourable demographic distribution in the country, increasing urbanization and an increasing preference for nuclear families.
Real estate prices in India have grown at between 15% and 20% annually, over the past 50 years, across cities and across various reasonably long (10 year) time frames. Over a long term this growth is projected to continue, given the combination of various enabling factors. These enabling factors include a favourable demographic distribution in the country, increasing urbanization and an increasing preference for nuclear families.
Such returns have been comparable to those in
the Equity Capital Markets. In fact, there is the additional advantage
that one is spared the variability and volatility associated with
investing in equities. For example while the BSE Sensex has multiplied
160 times since 1979, the components of the Sensex have been changing
constantly.
Tax efficiency available
There are several tax advantages that can be availed by investing in a second home. These include:
There are several tax advantages that can be availed by investing in a second home. These include:
1. The rent received from the second home
(less 30% for repairs and maintenance) can be set off against the
interest paid on the home loan taken for the flat. If the rent received
is less than the interest paid, then the resultant ‘Loss from House
Property’ can be set off against your regular income. Thus, there is a
tax hedge provided be the property till it begins to pay for itself.
2. When the flat is sold, the acquisition
cost (adjusted for indexation) is deducted from the sale proceeds and
only the balance is taxable.
Leverage scope
The purchase of a second home is the only form of investment for which leverage is available for salaried individuals. All other investments, whether stocks, mutual funds or Gold need to be made out of one’s own savings. It is possible to invest in a second home by putting only 20% of the cost of the home as one’s equity, and take a loan for the rest.
The purchase of a second home is the only form of investment for which leverage is available for salaried individuals. All other investments, whether stocks, mutual funds or Gold need to be made out of one’s own savings. It is possible to invest in a second home by putting only 20% of the cost of the home as one’s equity, and take a loan for the rest.
Financial logic
So then, the financial logic for investing in a second home is simple. Assume the following. You own the asset by paying only 20% of the cost. Your average cost of financing the remaining is 10%. The rental yield is 3% and property appreciates by 12% every year. Your financial situation every year is as follows (see boxes below).
So then, the financial logic for investing in a second home is simple. Assume the following. You own the asset by paying only 20% of the cost. Your average cost of financing the remaining is 10%. The rental yield is 3% and property appreciates by 12% every year. Your financial situation every year is as follows (see boxes below).
As is evident, the return on the investment is quite healthy.
The municipal taxes to be paid and the costs of maintaining the property have not been shown. However, the overall picture does not change significantly even with their inclusion. Other charges to consider are transaction cost like stamp duty, registration and brokerage charges.
The municipal taxes to be paid and the costs of maintaining the property have not been shown. However, the overall picture does not change significantly even with their inclusion. Other charges to consider are transaction cost like stamp duty, registration and brokerage charges.
Psychological factors
A house is a stable asset and is not bought and sold frequently. Consequently, it allows a longer time frame for any appreciation to play out. There is no greed or desire to cash in when the prices are high and there is no panic when prices do not rise.
A house is a stable asset and is not bought and sold frequently. Consequently, it allows a longer time frame for any appreciation to play out. There is no greed or desire to cash in when the prices are high and there is no panic when prices do not rise.
An important psychological factor is that real
estate prices do not fluctuate on a daily basis and there is no mark to
market that is available on a daily basis. This makes the house a
comfortable asset to hold.
In case of a rented out property, the home loan EMI is partly funded by the monthly rental income and reduces the debt burden.
The flip side
There are some factors that one needs to be aware of, before buying a second home. You should be comfortable with the monthly installment to be paid over the long term. Also, a property takes some maintenance and monitoring.
There are some factors that one needs to be aware of, before buying a second home. You should be comfortable with the monthly installment to be paid over the long term. Also, a property takes some maintenance and monitoring.
Those with transferable jobs will find this
especially challenging. Additionally purchase of property entails a
thorough evaluation of the developer, his track record and other legal
aspects of the property.
In summary, a second property could be a
worthwhile investment, especially for the salaried class if planned and
executed well. It could be an efficient way to build wealth over long
term.
Anil Kothuri, Head, Retail Finance, Edelweiss Financial Services Limited and CEO, Edelweiss Housing Finance Limited.
To read more Mumbai and Thane Real Estate Resources, visit www.mchithane.org
Contact
501, 5th Floor, Plot No - A-123/4,
Odyssey IT Park, Road No. 9,Wagle Estate
Thane (W) - 400 604, Maharashtra, India
Mobile : (+91) 9833 4583 23 E-mail: mchithane@gmail.com
Contact
501, 5th Floor, Plot No - A-123/4,
Odyssey IT Park, Road No. 9,Wagle Estate
Thane (W) - 400 604, Maharashtra, India
Mobile : (+91) 9833 4583 23 E-mail: mchithane@gmail.com
No comments:
Post a Comment