3 Questions to ask before buying a second home

3 min read
Are you planning to buy a second home? Here are the 3 most important questions to ask before buying a second house property, which will help you evaluate the things better before investing in real estate.

Things to consider before purchasing second home


In the previous blog, we discussed the things one should consider before making a purchase of housing property for primary residence. However, it is quite common in India to purchase a housing property from investment point of view. Let us discuss a few things one should consider before buying a second home.

Stock O Meter
Stock O Meter – A Complete Equity Research Tool by Invest Yadnya

3 Questions to ask before buying a second home

1. Is the property value appreciation more than the interest rate of home loan?

  • Most of the people prefer buying second home on loan. In this case there is a tax benefit associated with the interest payment of home loan.
  • For example – if a couple applies for a loan of INR 40 lakh at 8% p.a. Considering they appear in the top tax bracket of 30%, they are eligible for the tax benefit of (8%*30%) = 2.4% on interest payments.
  • Thus, their effective interest rate for home loan becomes 8%-2.4% =5.6%.
  • Here, one should compare if the property will appreciate at a rate higher than the effective interest rate of 5.6% or not, and accordingly take a decision to buy a second home.

2. What will be the Rental Yield on the second home?

  • Here, rental yield is given as [(Monthly rental income*12)/Original price of the property]*100
  • Lets understand rental yield with the help of an example. Considering a property worth INR 1 crore in any tier 1 city will fetch a rental income of ~INR 20,000-25,000 per month. This sums up to the annual rental income to the tune of INR 2.4-3 lakh. Thus, here the pre-tax rental yield is given as [(2.4 to 3 lakh)/1 crore]*100 = 2.5% to 3%.
  • However, if we consider taxes at 30%, here the rental income reduces to INR 2.1 lakh and further reducing miscellaneous expenses like maintenance costs, etc the rental yield comes ~1.5% -1.8%.
  • However , it is advisable that one should consider buying a second home only if the post-tax rental yield for that property is to the tune of 3%-5%.
  • Currently the post-tax rental yield in majority of the tier 1 cities is ~2%, which is not very attractive from investment perspective.
  • Usually , once the effective rental yield goes up ~5%-6%, the property is considered more lucrative and it marks the beginning of another bull run in real estate.

3. Are you ready to bear the financing liability (EMIs) for buying second home?

  • If one is buying second home by taking a loan, it comes with the commitment of paying EMIs.
  • Also one needs to note that buying a real estate comes with one-time lump sum down payment along with EMI commitments.
  • Many people tend to compare EMIs with SIP. However, SIP is a discipline while EMI is a commitment. One can always choose to stop/reduce their SIPs, however the same is not the case with EMIs.
  • Thus it is suggested that one should take a note of all the financing liabilities that come with buying a second housing property and then take a decision prudently.

2 thoughts on “3 Questions to ask before buying a second home

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.