Real Estate

Why you should buy a second home instead of a retirement plan

As retirement looms on the horizon, many of us begin to fret about our finances and where to invest to ease our retirement years. From investing in stocks to a retirement plan, there are choices galore to secure your future. Many insurance companies have come up with retirement plans that offer a regular stream of income in your retirement years.

Another viable option is to buy a second home to provide a regular source of income and security in your autumn years. Buying a second home has emerged as a popular financial decision since real estate is known to increase in value over time. Financial experts recommend this option over any other retirement plan due to the following factors:

Rental income

The most obvious benefit of buying a second home before retiring is the promise of assured rent.

A regular income is vital in retirement, and real estate provides a simple and easy way to finance life after work. Income from a rental property can also act as a hedge against a lo- interest rate environment and future inflation.

Moreover, rising property values and lowering home loan rates have made property an appealing option for anyone looking to raise post-retirement income.

Increasing rent over time

In most cases, the value of your property increases over time, so does the rent, while most of your costs remain the same, particularly if you take a fixed home loan.  

Investing in a property is a win-win option as the rental income can be used to pay the monthly EMIs of a home loan. This eases the burden of saving up a part of your salary to pay the EMIs. And once your home loan is paid off, the rent turns into income that appreciates over time.  

In comparison, a retirement plan fetches you high returns only if you adopt a high-risk strategy as safe investment options may not be able to negate the effects of inflation. 

Turnkey investments

An emerging trend in real estate, turnkey investments, are tailormade for those who want to earn a regular income while enjoying their retirement. Such investments are called turnkey because the property is customised to suit the needs of the client and is ready for occupation with the turn of a key.

For instance, built-to-suit offices are a popular turnkey investment in the commercial real estate market and find many takers.

As part of your retirement planning, you can invest in a property that has been developed and renovated by a developer and lease it to potential clients. You can also avail the services of a property manager to find tenants and handle them on your behalf.

Tax savings

Buying a second home also comes with the additional incentive of tax savings. 

While retirement plans also offer tax benefits under Section 80C and Section 10(10A) of Income Tax Act 1961, buying a second home offers similar perks.  

Under Section 80C of the Income Tax Act, taking a home guarantees tax savings on the principal loan amount.  

What’s more, the interest paid towards the loan also entitles you to tax deduction under Section 24B. When buying a second home, you can avail a tax deduction of up to Rs 1.5 lakh on the principal and Rs 2 lakh on interest payment under Sections 80C and 24B respectively.

Hedge against emergencies

A second home can provide you security and peace of mind in your sunset years. As rising inflation is balanced with appreciation in the property’s net value, it is considered to be a safe investment for future events and emergencies.  

Some retirement plans provide security for your children in your absence in the form of a lump-sum amount. A second home goes a step further and can be your cushion in case of any financial or medical emergency. You can liquidate this asset at any time to tackle your financial woes. 

A word of advice

While a second home provides income, security and tax benefits, don’t forget, you are still making a real estate purchase and need to exercise care and caution. The following tips can help you make the right choice while purchasing a second home:

It’s advisable to buy a second home at least 10-15 years before you stop working so that you can pay off the home loan comfortably. Also, carefully evaluate how this decision will impact your overall investment portfolio and long-term financial plan.

To ensure that your second home generates income soon after it’s purchased, invest in a ready-to-move-in property that can be easily leased out to tenants.

To attract tenants, make sure to invest in a property is located around a sound social infrastructure with schools, hospitals and retail centres. It also helps to stay close to your investment home to watch over your property and be available to the needs of the tenant.

To minimise your risk and generate highest returns, seek the help of a property consultant to help you make the right choice for a second home. Their market knowledge and network can help you choose the right property and find tenants.

Remember that even as rents rise over time so do maintenance bills of your second home. Also, factor in times that you are without any tenant for your property.

Due to the high cost involved, it is often difficult and time-consuming to liquidate an asset like a house. Selling off your second home to meet an unforeseen expense may result in losses as you may have to settle for a lower price.

Conclusion

With careful planning and forward thinking, you can secure your retirement years and look forward to this phase of your life. After all, retirement gives you the time to do all the things that you never had the time to do when you were working. By investing in a second home, you can rest assured and spend time with family, travel and lead a life of financial independence.

This article is contributed by RoofandFloor, part of KSL Digital Ventures Pvt. Ltd., from The Hindu Group

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Printable version | May 19, 2020 3:25:17 AM | https://www.thehindu.com/real-estate/why-you-should-buy-a-second-home-instead-of-a-retirement-plan/article19895768.ece

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