Do vacation homes make for a good investment? - Real Estate India

??|?? August 6, 2012 ?? 11:51pm ??|Contributed by MANOJa

You?ve just arrived at your favourite holiday hotspot, only to spend harrowing hours looking for a hotel room because you couldn?t book one in advance. What do you do? Perhaps think of buying your own house. It?s a tempting idea, especially if you visit the tourist destination at least twice a year. Does it make sense to buy a property if you end up staying there for just two weeks in a year?

Is it a good investment option or just a lifestyle choice? Should it be solely for your use or do you plan to glean income from it by renting it out for a few months? Here are some things you should consider before buying a house in a popular tourist destination.

Earning returns

Since you will not live in the house round the year, you could give it out on rent. However, the rental income from such a house is not consistent compared with regular properties since the peak tourist season lasts only 12-15 weeks in a year. So, if you are investing purely to generate rental income from your holiday house, you may end up struggling to find tenants in the non-tourist season. While the rental income during tourist season can be quite high, you will have to evaluate if it?s sufficient to cover the cost for the entire year.

Shveta Jain, director, residential services, Cushman & Wakefield India, says, ?The average rental return does not exceed 2-7% annually for most holiday destinations. Most cities usually yield higher returns.?

You should also conduct a study on the prospective growth of the destination. Capital growth is typically the highest in towns that have a year-round tourist appeal and a well-established economic base. Also, if the place has the potential to attract people for reasons other than tourism, such as being a MICE (meetings, incentives, conventions and exhibitions) destination, there will always be demand for your property. It may also be easier to sell the house if it?s in a popular area.

Capital appreciation should not be the only criterion for buying property. You must also consider other factors, such as the market dynamics of the location, construction of other property, and accessibility to the area. So, make sure that the house you buy is close to a business centre, a beach or major tourist attractions.

Anand Narayanan, national director, residential agency, Knight Frank India, advises that one should buy a vacation home for the right reasons. ?Vacation homes are usually lifestyle choices, not financial investments. If you want to invest in real estate, consider buying a property in a city rather than in an out-of-the-way destination,? he adds.

Maintaining the property

Keeping a holiday home in pristine condition is usually more expensive than for a regular house, whether you keep it locked for the duration you don?t live there or give it out on rent to different people. You will also need to furnish the house with furniture and appliances, which may need to be replaced regularly if too many people visit the place and are not too careful.

You will also have to hire a caretaker to ensure the security and upkeep of the property, as well as visit it regularly. After all, you don?t want to visit your home for a relaxing weekend only to find yourself cleaning it or being embroiled in a brawl with encroachers. All this work, including leasing the property to tenants, will also require you to devote ample time to it. So, invest in the property only if you can visit it frequently.

Due diligence

Whether you are buying a house to live in or visit occasionally, you need to conduct due diligence before signing the sale agreement. Check that the property has all the requisite permissions and that the current as well as future infrastructure development in the vicinity is sound. Om Ahuja, CEO, residential services, Jones Lang LaSalle India, says that unless the second house has essential facilities, such as water, electricity, sewage and road accessibility, it will not serve much purpose. ?To avoid problems, it is best to buy a second home from a reputed developer who is known for building high quality projects,? he adds.

If you are buying land, you will have to consider the necessary land and title clearances, and ensure that it isn?t considered agricultural land. If the property is close to a wildlife reserve, you may have to obtain clearances from the environment department too.

Before you buy the house, visit the area a couple of times to judge whether it will sustain your interest for the long run.

Tax benefits on your investment

You can avail of all the tax benefits on your vacation home as on a regular house. If you have purchased the holiday home by taking a bank loan, the interest paid on the mortgage is allowed as deduction for tax purpose. If you take a loan to buy a house that is still being constructed, you can deduct 20% of the total interest paid during the construction period. This can be availed of till five years after the construction is complete and you take possession of the house.

You can also deduct the expenses incurred on the house, such as the municipal and property taxes that you have paid, from the rental income. Other than this, 30% of the net annual value (difference between rental income and municipal taxes) is also allowed as deduction. This amount is considered as expense incurred by you to maintain the property.

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