Ketan Shah, 40, and his wife Namrata, 36, are both bank employees. They are doing well in their professional field and leading a planned life. A varied investment portfolio in the form of bonds, deposits, mutual funds, and stocks, place the couple in a comfortable position with respect to their financial goals. Ketan and Namrata live in a spacious, self-owned apartment, and they own two hatchback cars.
The duo now has savings worth Rs 30 lakh, and they are considering different investment options. They have been talking to friends and family for suggestions and are also doing internet research to figure out the best investment opportunities. Owning a second home never crossed their mind until they spoke to a cousin who whole-heartedly suggested real estate. In fact, real estate in India is becoming a preferred asset class for investments driven by increasing transparency and returns. Till October last year, the sector attracted investments worth US$30 billion.
The major growth in demand for second homes can be attributed to Income tax exemption on notional rent of a second self-occupied home as well as the increased benefit of roll-over of capital gains. These are some of the reasons that are prompting homeowners to invest in a second home — turning it into a weekend home or purely for the purpose of investment.
Though all of this has a nice ring to it, there are, however, many other factors that Ketan and Namrata need to consider to make the most of their second home investment. If you too are thinking of buying a second home, the following factors will help you make the right purchase decision and maximize your ROI.
Take Into Account Entry-Level Price Points to Make the Most of a Second Home Investment
Profiting from a second home investment involves a range of considerations. Although the location and the property segment play a key role, the most important factor is the entry price, which directly impacts the return on investment.
Real estate experts recommend investing in upcoming locations that offer significant scope for growth in the mid-to-long run. If you enter a market where property prices have already reached an optimum level, then it’s likely you won’t gain much from your second home investment.
Be it an investment for rental income, holiday home near a tourist place, or an investment for capital appreciation, a correct evaluation of the cost of acquisition will strengthen your chances of making the most of a second home unit.
Realize the Income Potential of the Asset to Make the Most of Your Second Home Investment
In the past, people used to buy a second home from an investment perspective and kept their homes vacant all year round. For a return on their investments, they mostly relied on long-term capital gains. Things, however, have changed in recent times. Nowadays, giving out second homes on rent is increasingly becoming a trend.
Today, renting out a property for a tenure of 11 months, with an option for periodic renewal, is the usual practice. This is infusing confidence in many homeowners, enabling them to decide the period until which they want to rent out the property.
Renting out your second home will generate a fixed income, while the value of your property normally appreciates over time. On a residential property, the rental yield could be as much as three percent to five percent. The income can not only add to your savings, but it can also take care of the property tax, maintenance costs, and other expenses.
Use Airbnb to Get High Returns on Your Second Home Investment
Many second-home buyers invest in vacation homes outside the city limits, which are perfect for recreational getaways. But homeowners do not consider them as income-generating assets because these properties remain vacant for most of the year. Now, with the emergence of Airbnb, vacation real estate can also provide a great opportunity for earning short-term rentals.
From holiday homes to guest rooms, homeowners can list any property on Airbnb. The listing process is free and easy. You can set your rates, specify the booking criteria, and host guests at your convenience. You can also get acquainted with your potential guests before accepting a reservation request.
Availing a Home Loan Can Help You Maximize a Second Home Investment
Homeowners, under Section 24B of the Income Tax Act, can claim a deduction of up to Rs 2 lakh on their home loan interest payment, if the property is self-occupied, or inhabited by immediate family members. With rented properties, the owner can claim a tax deduction on the total home loan interest payment.
Section 80C of the Income Tax Act allows a deduction of Rs 1.5 lakh on the home loan principal repayment. Section 80C also covers registration charges, stamp duty, and other expenses related to the property transfer, subject to a maximum deduction of Rs 1.5 lakh.
The government, in Budget 2019, extended the benefit of self-occupied houses to two properties. This means, if you, or your immediate family members, occupy two houses, you do not have to pay income tax on the notional rental income of the second property. This makes second home investments even more rewarding.
So if you’ve been toying with the thought of making an investment in a second home, now is the time to do it. Take advantage of the favourable property market conditions and explore the opportunities to make the most of your second home investment.
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[…] a second home investment can be quite lucrative and there are substantial tax […]