A large number of second-home buyers purchase expensive homes that provide them with a flight away from the city, where they can relax & recover.
Recent changes in tax laws, in the financial year 2017-18, have changed the house buyers’ outlook towards investing in secondary homes. One prime reason, is that the deduction of Rs 2 lakhs, available on home loan interest, is now equal, for both, rented and self-occupied property. Moreover, the loss of house property that can be reduced from ‘income from other sources,’ is confined to Rs two lakhs only. As a result, many salaried employees and people in business, who investigated second homes so that they could reduce their tax responsibility, are now looking for other means to earn profits.
Most second house investments range in a ticket size of Rs 40-80 lakhs, with homes in the premium segment. Earlier, buyers purchased the property from an investment point of view and kept the homes vacant for the most of the year. The profit on their investments, came only when property prices increased, over many years.
The profit on a secondary home will depend on the segment, the neighborhood and the probability of renting out the unit. There have been situations, where renting happens regularly and with a right amount as a rental. However, if the entry price (the cost of buying the unit) is high, it impacts the return on investment (ROI). Similarly, purchasing a second home in a location where the cost of the group is lower, may also entail less frequent renting and lower rentals. So, making an intelligent decision while buying a second home unit, is all about buying where price-points are not too expensive.
The maximum deduction on interest is now capped at Rs 2 lakhs, against the entire affair that was tax-free earlier, even though there is a prerequisite to carry forward the losses in eight consecutive financial years. Even with this carry forward ability, it will still be a loss-making venture, for those trying to buy a secondary home with loans because the interest on loans as well as on rental income, will become chargeable. The clever way out would be to check one’s investment collection and plan one’s finances, in a manner that permits the enjoyment of the benefits of a second home, without stinging money.
However, finding the correct balance may not be easy, especially when there are so several factors that can affect prices and the property market’s economy. Some of the circumstances that one should consider are population growth, affordable pricing, location and infrastructure development. Generally, higher rentals can be expected near educational zones and corporate hubs.
Most importantly, a buyer must be clear about the meaning of purchasing another home. It is always a valid idea, to consult with one’s friends and family, before taking the ultimate decision.