Jagoinvestor
April 2, 2019
Should you buy 2nd house as an investment? (28 min video discussion)
I along with my teammate Sagar, recorded a 28 min video discussion related to this topic – “Should you buy 2nd house as an investment?” yesterday. We talked about various pros and cons which are often missed by those investors who are thinking of buying the second house for investment. Watch the video below
What we discussed in this video?
- When does it makes sense to buy a 2nd house?
- How does it impact your cashflows and stress level?
- Why are investors so attached and attracted to buying “Real Estate”?
- What are the real-life issues which investors face after buying the 2nd house?
- Is it an emotional decision or a financial decision?
- Why buying just 1 hour is enough for 95% of investors?
- Why illiquidity is a big issue with buying a 2nd house?
- How 2nd house can create a good second income, and in which cases?
Do let us know if you have any comments after watching the video!
How about investing in REIT , does REITs have good future in India ? instead of 2nd house is investing in REIT better option.
From what I know, there is no REIT in India currently, specially for retail common investor. Are there any?
Hi,
Thanks for such an informative video. Could you also please let me know if someone who has considerable cash in hand (which you mentioned in your video too) will it be a good decision to first repay to reduce the home loan (home taken for investment purpose) or divert that money to make further investments in DEBT and EQUITY (e.g. FD´s, MF´s, Shares, etc) to balance assets / investments . What will be more beneficial considering returns on investment ?
Considering the returns, it might be great if you divert that into equity/debt funds. However this is not a single factor based on which you need to take decision. Its quite a big topic and cant be covered in a comment. I will try to write on this
Manish
Thanks Manish & Sagar for such Wonderful information. I do agree that investing in 2nd home is really waste of your money unless you buy it Outright without any Loan. I have question on Commercial Property, which is more easily to liquidate, earns more rent and also valuation is more faster.
Does Investing in shop with good rent which mostly covers your 75 % of EMI is better choice and good diversification along with Equity & Mutual Funds.
Yes Prasadh
I am all in favour of a commercial property because it makes a lot of sense if done in a right manner and at the right time. Just make sure that you are firstly able to provide for other core financial goals and if after that your cashflow allows it along with your risk appetite , I think its a great thing to go for !
Manish
Another point which makes real estate buying & renting it out makes its exciting is the Rental income is considered as tax free by most investors, many landlords collect the rent in cash & this does not come under IT scanner….so seems good option though we may see stricter laws from Income tax dept in near future..
True
However this going forward will become very tough .. I mean if your rent is a small amount may be cash is ok, but for a big number, many people would prefer to pay rent in white and then what you said about “tax free” income does not makes sense !
Manish
That is really nice informative video and best part i liked the point you raised that ” Ultimate detestation of money is in Property” (as per people mindset). I am also part of same group. Now & then, i used to get free advise like why don’t you buy /invest in property when you have money. I always avoid to answer that question.
Can you please advise, what are the option (apart from FD) for people who get the bulk money Say 1 crore or 1/2 crore (say from selling a property, retirement , maturity of FD) etc ?
You can put money in commercial real estate or mutual funds .. There are many options !
Thanks. Very educative.
Welcome
It was a very nice informal discussion on owning a second property. Another point comes to my mind is , when you invest you invariably pay from your bank account which is white , but when you sell a part of the money you receive in black. Also the capital gains you need to invest in bonds or in another real estate to save taxes & you will get caught in this vicious circle unless you are a pro in buying / selling real estate.
Very good point . I didn’t not think about it while creating the video !
Thanks for sharing this.
Manish
thanks for the video and the financial wisdom.
most of the points were covered by youll.
an aspect i would like to point out was the return on rental income visavis the opportunity cost of same in say FD interest on per anhüm basis considering the value of the property. considering interest rates are higher then FDs give better return and its more liquid than RE.
Good point John,
We did not do too much of mathematical analysis in video as it was not possible there. But its a good point of discussion !
Manish
Thanks for giving this valuable information. Can you please let me know how do you calculate the returns in real estate.
Say for eg: a house bought for 50 Lakhs becomes in 1 Crore in 5 years, what is the rate of return?
Can you please cover on the below topics.
1. NPS
2. Mutual Funds for retirement
3. Manage loans (How to clear loans quickly)
4. Gold Investment
Hi Pavan
The example given by you is pretty simple . The formula is like this
CAGR = [(Current Value / Purchase Value)^(1/years)]-1
So as per your example , it will be [(1 cr / 50 lacs)^(1/5)]-1
= (2^.2)-1 = 0.148698355 , which is same as 14.86% …
How ever if its complicated, then the other way to calculate it is called IRR or XIRR, which is explained in this video by me : https://www.youtube.com/watch?v=iJ6Y8qxZu3o
I would like to cover other topics suggested by you ! .. Will inform as and when we come up with other videos
Manish
Thanks for selecting this evergreen confusion and specially when govt allowed tax benefits on 2nd home too. It was very live discussion and in very continued manner , looks fresh , very original and informal. It was great in short covering all if and but associated with this topic of buying 2nd home. I have gone through the phase of selecting wrong property and I know how hard it is to sell than to buy real estate when you expect only the amount paid in EMIs with saving interest in return. And its very true that main reason behind is unavailability of daily property index (specially the property one bought) and another reason is the sense of proud/social status of having more than property as equity worth is not similarly visible. One thing to ask for a common man, what shall be the ideal exposure in equity/debt/gold/real estate/FMPs/ mutual funds (% of small/mid/large cap funds) and what can be other instruments
Hi Sudhank
Thanks for sharing your feedback, its really valuable for us, especially when we are new to create such type of content 🙂
Ideal Expousure to an asset class has to be very different for different people based on many factors like Age, types of goals you have, your mindset, your knowledge and risk appetite etc. However I am still giving a general answer.
Ideally one should be high on Equity side especially when you are young (below 45) with some portion in debt and rest in real estate (FMP is debt only) . I dont like gold personally as investment hence I am not counting that at all.
However in todays times, its almost given that a perosn will be heavy on real estate in start as they will buy it on loan , hence give that – One has to be aggresive in investing in equity and by the time they reach 50, they should atleast have 50-60% of the portfolio in equity.
Thats my view. What do you think?
Manish
“Ideally one should be high on Equity side especially when you are young (below 45)”
How much it should be in general?
There is question that any real estate will appreciate, in the world’s most populous democracy. Eventually people need a place to stay.
But one point you have not addressed is that there is a lot of blackmarket/grey market activities in real estate. Properties are undervalued on registration, and cash transactions rule. Benami properties are too common.
Hi
Yes that’s a good point to cover, however we just wanted to talk on 2nd house topic and not a generic topic of real estate hence we did not cover it.
Also real estate will increase , no doubt , but then saving bank balance also increases no doubt. The question is HOW MUCH ?
Manish
Really a good discussion.
Thanks Balan
2nd house is a good investment only if you have enough money other than your retirement, child education/marriage, health corpus etc.
It creates a passive income, also it is important that the location is chosen very carefully if rental income is the only idea behind buying a second house.
Aptly put 🙂 .. Thanks
The thing is that most people buy their second home just near they main residence. What are the chances that the area near your house is the best for such a business? It is very likely to exist a better area in another city or another region. I started to think this way since I used numbeo that has all the statistics. I believe knowledge is power, and real estate investing needs a lot of preparation.
“The thing is that most people buy their second home just near they main residence”
Are data you have for this? I think its totally opposite of what is true (Even I don’t have data). Most of the people buy a second house not near their home. They want to diversify location wise and some times even city.