Think before you invest in a second home

Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…

1. Your appetite and eligibility for a second home-loan

The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.

2. The appreciation in property cost

Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.

3. Do your financial math

If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession.  Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.

* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.) 

 

Home Loan Calculation
Disbursement Month Payable Amount Disbursement Amount Actual payment including interest (@ 10%) as on Jan’2014
Month 24 Jan’2012 25% 1000000 1220391
Month 22 Mar’2012 10% 400000 480121
Month 19 Jun’2012 10% 400000 468315
Month 16 Sep’2012 10% 400000 456800
Month 13 Dec’2012 10% 400000 445568
Month 10 Mar’2013 10% 400000 434612
Month 7 Jun’2012 10% 400000 423925
Month 4 Sep’2013 10% 400000 413501
Month 1 Dec’2013 5% 200000 201667
Total Payable 4000000 4544899

 

In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.

4. Long-term horizon

If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.