Buying a house is a big goal for most people in India. Apart from creating a tangible asset, there is a huge emotional value that we attach to our owned properties. Buying a house to create a home that you are going to live in, is an easy decision, but buying the second house is what causes the dilemma. Very often I come across people who wish to buy a second home in a particular city or area. Many a times this is a wish of having a house in the hometown or a city where they would like to retire. The dilemma is often because of limited resources and multiple responsibilities.
I recently met Neeta and had a conversation with her on her finances. She and her husband Amit make a good income from salaries. They have two adorable daughters aged three and one. Amit’s parents live with them and Neeta’s parents live close by. A busy corporate life and managing two vivacious little ones, leaves little time for Neeta and Amit to manage their finances. Besides, Amit’s father’s health is a cause for concern. Both Neeta and Amit are single children, so they have complete responsibility of both sets of parents.
They jointly own the house where they live. The home loan will be repaid in about 7 years. They also have a car loan going. While they expect a reasonable growth in income from salaries, they also see challenges in managing their money in view of their multiple responsibilities.
Neeta has a dream of owning a bungalow property in her hometown which is a tier two city. She wishes to settle down there post-retirement. Her dilemma is whether she should take the plunge and fulfil her dream.
Neeta needs to look at an answer to this dilemma in three parts.
Emotional Aspects: Though she has grown up in her hometown, for several years now she has moved to a different city. Her parents also moved to be closer to her. There is an emotional connect in her memory, but if she goes back to her hometown after many years, there might be very few real connections left. Their retirement is at least 25 years away. There are several changes that might occur in this period. Her hometown could change drastically in this period. She might not want to stay there eventually. She might take a liking to another place to settle down. Their kids might be working in different cities or countries. They might want to live closer to their kids, like her parents did. Looking at all these aspects, it is better to select a retirement abode closer to retirement rather than so early in the career.
Financial Aspects: Looking at their cashflows, though she can afford to take a second home loan, she needs to be careful. There will be stress on allocations to other goals, primarily retirement. She should look at a second home goal only when she ensures sufficient liquidity for emergencies, a robust health cover for the entire family including parents, adequate life and accident protection for self and spouse. She will also need a good allocation to education funding for both the daughters. And above all smart cashflow management to ensure best possible utilization of the resources.
Logistics: Managing two homes in different cities has its own sets of problems. They will have to travel many times to ensure upkeep of the property, for making statutory payments (if not available online), to meet potential tenants if they let out the house etc. With an already stretched time schedule they might find this taking a toll on their life.
What can Neeta do?
Looking at all these, I would not say that she needs to give up her dream of the bungalow property. She would probably need to look at that dream in a different light.
Option 1: She can look at a smaller property in her town of choice instead of a bungalow. A flat in a well kept society would be fairly easy to rent out compared to a bungalow. The income generated from that could be reinvested as a separate corpus to buy the bungalow. Later, she could sell this flat and add that amount to the bungalow corpus. With this she will have a smaller EMI outgo which will not put too much pressure on her current cashflows. She will also be able to avail interest deduction on the home loan. Since she co-owns the property they are currently living in, the full interest amount can be claimed as deduction for the new property. She will have to take care that she buys a ready property or one that she can get a possession within 5 years (to be able to get full deduction on the interest).
Option 2: She can buy a house in the same city that she is living in. It will be easier to manage the property. Since it is a second property for her there will be no impact on the taxation front.
Option 3: She can start accumulating financial assets through regular savings and investments. Some of this could be earmarked for the property purchase. She can decide on a property closer to her retirement, where she would actually want to stay. It would be easier to maintain and manage a portfolio of financial assets as compared to a property. Automating her savings and investments will ease out the burden of managing the portfolio on a regular basis. Hiring an investment advisor can help monitor cashflows regularly and ensure that the plan is always on track.
You need not let go of your dreams, but need to carve out a stable path with wise financial decisions to make those dreams a reality.