Should you own that dream second home?

Nitin VyakaranamArthaYantra.comFor many, real estate is a “safe-haven” for investment, in particular, the idea of investing in a second home. Pros include an increase in net worth of the owner, tax-saving on monthly take-home, source of secondary income through rents, reinvestment, reselling, lease etc. All in all, owning a second house is equated to image building, financial security and confidence. Some notable advantages include:1)Savings in taxesFor the higher income level group, buying a second house on a loan is a way of saving taxes on their monthly take-home. The EMI (Equated Monthly Installment) helps them claim benefit under Section 80 C for the principal repaid and section 24 B for the interest paid.2)Source of secondary incomeFollowing the tax-saving part, people consider investing in the real estate to create a regular source of secondary income. Rent accumulated on a second house covers up for the EMIs paid, thereby facilitating an easy repayment of the actual price of the property over a period of time. Since rent is subject to annual increase, it helps in additional savings.3)Investment for future needsFor some people, investing in the real estate is to have ready finance for after- retirement life, child’s education, daughter’s marriage etc. In such cases, the expected is a property appreciation that can take care of all that inflation and actual price of the objective/s, the goal/s. If only determining the purchase of a second house was that easy. In fact it is never too simple to assess capital outflow and the capacity to commit to long term repayment plans. A hasty take on a secondary purchase, can become a liability. While pros are aplenty, the below listed cons cannot be overlooked while contemplating on the purchase of a second home.1)Savings take a backseatSavings of a person takes a backseat when commitment to EMI comes to the fore. To accommodate such regular commitment, individual often makes a lot of lifestyle adjustments. As EMIs remain constant, an individual’s finances are vulnerable to contingencies resulting from job loss or ill health.2)Liquidity Real estate is tough to liquidate. It requires a lot of time and attention to process its resale. Also, the risk of not being able to sell such asset during emergency could be an important aspect to mull over. A hasty decision on selling property may lead to improper negotiation and thereof a bad deal, and financial loss.3)Tax savings Home loan payments do provide tax-savings up to INR 1.5 lakhs under Section 80 C. But similar tax-savings also take place through PF (provident fund) contribution, insurances, child’s education etc. For home loans, one gets tax benefit on the principal amount, as well as the interest portion. In the initial years, since the interest pay is high, the benefit on it is also high. But over the years as the interest pay goes down, the tax benefit thereof has only a little coverage on taxes accrued through regular income (primary employment). Therefore, we must know that tax-benefit is effective for a limited time only.4)Other associated risksOther risks associated with the decision of owning a second house include-•Risk of rented home being vacant •Risk of home being let out on lower rents •Maintenance cost may deplete the income from the second propertyMatters of heart and finances need time and attention and should never be rushed. What may seem an easy option today, may lead to some financial misery tomorrow. If you cannot decide for yourself, engage a professional hand and seek guidance on the entire process of determining to invest or not to invest in a second house.