Factors to Consider Before Buying A Vacation Home?

Written by Vidya Kumar

September 23, 2020

Summary: A vacation home is a great place to make happy memories and also earn additional income. But before you purchase one, consider factors like the extent of investment, maintenance costs, management effort, the credibility of the seller, and taxation.

Buying a home has always been a top investment priority among most Indians. It is a matter of prestige, security, wealth, and we also believe that it gives optimum returns.
Many people choose to buy or build a second house as a vacation house. They acquire it in hill stations or other holiday destinations. They either keep it for themselves or use it as a vacation house and also let it out to holidaymakers. Just like any significant investment, buying a vacation house requires some research and considerations –

Affordability of the home

You have to be clear if you can afford to buy a house and service a home loan. It is important to calculate the add-on costs like maintenance, repairs, insurance, and security. If it is far from your current location, you need time, effort, and money to go there for managing it. You will have to pay utility bills as well. So while considering the cost of the house, add 1-2% to the purchase price to include these factors.
In the current scenario, real estate prices are down, and so are interest rates on loans. If you are keen on buying a house, you should consider a deal. You may be able to negotiate for a reasonable price provided you do thorough research on the location and the builder/seller.
You must have your emergency fund in place and ensure that the financial plan remains stable even if you make this investment.

Return of Investment and Expectations
Assess the expected rent (if you will lease it out) and the appreciation of the asset. It depends on various factors and you may not be able to get returns like a home in a residential area. It is important to set realistic expectations. The rent will depend on the tourism potential of the place and how suitable the location of the house is for tourists. For example, if the house is in Goa, many tourists want to live on the beach. On the other hand, many tourists want to live in places that are close to eating joints and tourist spots.

Maintenance
Maintenance of a house is a tough job. You have to take responsibility for broken pipes or electricity issues. You have to keep the house clean. Vacant houses can be targeted by thieves etc. and you have to take the necessary steps to protect the property. Be clear if you are inclined to take up these responsibilities along with the additional travel or have someone to take up these tasks.

Taxation
If the vacation home (second home) is for self-consumption, the gross annual value shall be taken as NIL, unlike earlier when deemed rent came into the picture. In the old tax regime, you can claim up to Rs 2,00,000 as deduction towards interest on home loan for self-occupied houses and Rs 1,50,000 towards principal repayment on housing loan. If you follow the new regime of taxation, the interest on housing loan and principal repayment on housing loans will not be considered for tax deduction.

Seller Credentials
It will be safer to buy property from a branded developer. Check the credibility of the seller,  project completion track record (new houses), and the condition of property before plunging into the deal.

The idea of owning a vacation home is tempting. At the same time, it is a significant investment. Before you make your decision, conduct meticulous research, select reputable sellers and ensure the paperwork is complete.

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