Buying a second house – sure way to kill your happiness
The other day I met Akram who had just sold his small 1 BHK house (shifted to his new house) and wanted me to advise him on where to invest few odd lakhs he had received. During my discussion with him I found he was planning to buy a second house.
This got me thinking as to why people want to buy a second house and how good or bad this idea is.
Some reasons of buying a second house:
So let us first try to look at the reasons why people (in Indian scenario) buy or want to buy a second house though they are already living comfortably in one. The simple answer I get is, for investment purpose. The belief is that the second house will give them good returns in terms of capital appreciation and monthly cash flows in terms of rental income. Fair enough!
Some also buy it because they have cash (for whatever reason) and this is the only way to use up this cash. So it is white money chasing black money kind of situation. Some buy they get better feeling of security when they own a second house rather than when they invest in other financial instruments. It makes them feel good.
Then there are some who want to use this money in future for some important goals like higher education or marriage of their children and some simply look at it as a way to transmit their wealth to their heirs.
One real estate savvy person told me he does it regularly because that is the best way to save tax as interest paid on EMI is subjected to deduction from gross salary for purpose of calculating the income tax. This rebate was unlimited till last year, when a cap of 2 lakhs was introduced by the government.
And finally there are some who do not know what else to do with their money. They have accumulated some money and looking at “trusted” advisors in friend, relative or a neighbour to advise than on best available house to invest in. As a legacy inherited from their parents they only know or think that they know that buying house is the best way to put your money to use. They also believe that this is one of the investment avenues which do not have much risk.
What is the reality of such investment?
The capital appreciation on 2nd house is a very subjective matter and is dependent on many external factors. These factors are neither predictable nor are they in control of buyer or the seller. There is a good risk to you basic assumption of good if not high capital appreciation. Now what is good appreciation. People only look at absolute value- Example 50 Lacs of my investment has doubled in 6 years. So what is the CAGR, it is only 12% and not a phenomenal one as people think!. This return will further come down if you hold this second house for a longer period and beyond 10-12 years the house will start depreciating rather than appreciating!! Does it make sense ?????
The much sought rental value of the second house should be looked from perspective of return on capital employed as the usual practice for any investment. On an average rents on any house property is to to the tune of of 3-5% . The returns will decrease further if you take the cost of maintenance or opportunity cost of vacancy (house lying vacant before new tenant enters) municipal taxes, interest paid on EMI etc. You can verify this by estimating the rental value and market price of house you are currently living in!!
All above comes at great risk which people fail to recognize. There is huge risk of delay in delivery. Rarely have houses been delivered in time which basically means increased cost as you pay EMI while returns get delayed. These days stuck projects mean you may not even get the house. The quality promised and one delivered can be poles apart. This is true for ready to move also as you are not qualified to estimate the quality on peripheral look. Sometimes even the promised features like club houses and other facilities can go missing. Your unruly tenant can also be a threat in terms of no or delayed rent or poor upkeep of the facility.All these are risks which when materialize can screw your happiness big time and for long time.
EMI is easy to get from bank these days as they are the ones who are in the business of pushing you to buy second house. If making money of house was more beneficial that earning interest income on loans , bank would be buying property rather than lending money. By reverse logic buying houses on EMI is convenience coming at great cost because while EMI is certain while return on this investment is highly uncertain. HIgh EMI suck complete liquidity not to speak of long term commitment you are entering into. This can play havoc with your personal finances. You may be forced to take high cost loans for other goals like buying cars and other gadgets, holidays etc. I came across an individual who had taken loan to pay quarterly fees of his 2 children because he was paying 2 EMI. Can you imagine!!!
Then there is additional hassles of paper-work involved in buying a house, registering it and also when you intent to rent it out. The last one being repetitive in nature. Similar kind of paper-work will be required once you decide to sell off the property. These trouble get magnified once you are not living in the same town. (yes you may have to change town for variety of reasons). Imagine what will happen to such houses when you transmit them to your children and they are living in some other part of the world for their job.
Add to this the fact that it is not easy to get a buyer when you want to sell. More expensive the property more difficult it is to sell. You may end up stuck with it. Why will anyone buy an old house when he has option to buy newly constructed property ( unless your property is in New Delhi Lutenyan or at Nariman Point in Mumbai!!). Also you may end up generating cash for yourself – buyer insists on paying some % by cash which may be as high as 50%. Once you get this cash again you have no option but to buy another property and thus you get into vicious circle of house buying and selling.
Buying second house as an investment, does it make any sense? The returns are uncertain and come with great risk. You would be much better off if you invest same money in financial instruments to meet you future goals – both liquidity, safety and returns can be better if you choose appropriate investments. You get added advantage of diversification rather than putting big chunk of money in one instrument. Your children will be happy to receive your money in a financial instrument which they can liquidate or keep with them easily anywhere they choose to live. Inheriting property these days is inviting trouble.
Structural changes in economy and real estate industry has made investments in second house ( or real estate for that matter) a bad idea now. Government regulations like RERA, corporatization of builders, internet etc have done away with lot of unhealthy practices of past which was artificially jacking up prices. This will adversely affect the ability of any abnormal returns anyone can make from these investments. Similarly ability to use up cash (without generating more) and taking any greater tax advantage are all getting capped in new regulatory environment.
Are you making investments for peace and prosperity or are you intending to screw your financial happiness big time and that too for long time.So what are you waiting for – just get up and junk the idea of buying a second home!!
Sure way to kill your happiness -buy a second house
The other day I met Akram who had just sold his small 1 BHK house (shifted to his new house) and wanted me to advise him on where to invest few odd lakhs he had received. During my discussion with him I found he was planning to buy a second house.