IT HAS become more or less a set pattern now for middle-aged people, mainly above 40 years, to consider seriously, buying what is called a 'second home' or a 'holiday home'. In fact, many exhibitions are being organised by builders and developers urging people to go for their second home, a little far away — may be at an hour or two drive — from their homes.
A second home is not a bad idea. It can serve the purpose of a change from the routine, once in a while, and leave you refreshed and energised. It can be a wise investment. But nobody should go overboard on this. It would be wiser to consider the following points before one goes for a second home:
1. These properties are not exactly cheap. Realty prices can slide.
2. Often, it is difficult to ascertain if the quoted price is reasonable because of a lack of benchmark rates. Many places are being developed for the first time and, as such, there is no way to determine if any previous deals have been done and if so, at what price.
3. It is easy to buy such property but it could be very difficult to sell it. Hence, if you are considering a second house as an investment then you should be careful about liquidity.
4. If you are buying the property out of borrowed funds then you should ensure that monthly outgoings by way of EMIs and such other fixed commitments on borrowed funds do not exceed 50% of your income net of taxes. Otherwise, all your life you will be forced to work for EMIs and you may not, in the real sense, enjoy this second property. An asset acquired through borrowing can turn out to be a liability if the asset prices were to fall or if the interest rates were to rise.
The intelligent option would be to decide on an asset allocation plan keeping with your age and risk appetite. While the first house is a necessity, the second house is taken into account in one's net worth. This is a risky asset in the sense that the returns on this asset — rent, if any, and capital appreciation — are uncertain and hence a second house is classified as "equity" while working out the asset allocation plan. If your age is around 40 years and if you are not wary of taking risks then your asset allocation can be along the following lines:
Fixed Income options like PF/PPF/Bank FD, etc. 30%
Equity/real estate (shares/mutual funds) 60%
Gold 5%
Liquid investments like bank deposits 5%
If you are conservative in your attitude and approach, then the ideal equity allocation, including investment in a second house, could only be around 40-45% of total assets with increased allocation to fixed income options and gold.
You can definitely consider investing in a second house keeping in mind the factors of price, liquidity, affordability from EMI perspective, access from your current home and most importantly, whether it fits in your asset allocation depending on your risk profile.
