Should you buy a weekend home

TomorrowMakers ™

Should you buy a weekend home

08 November 2017
Not sure if buying a weekend home is a good idea? Or is it better to invest that money in another investment? Here are some things to consider before taking that leap.
 
 

First Things First - What qualifies as a weekend home?

A weekend home is basically a second home or vacation home you buy with the sole intent of relaxation. Most people prefer to buy weekend homes in cool, hilly places so they can get away from the hustle bustle of the city life on weekends. For some, a weekend or second home can serve as a residential property after retirement.  Many even rent out their properties when not in use, making it an additional source of income. But does this make them a must-buy?

Are weekend homes a good option?

Consider this situation - you have more than enough money to buy a beautiful home or you could use that same money to take a month-long trip to Europe. Which would you choose? A few years ago, buying a house would have been the logical choice; but not anymore. Millennials are bringing about a lot of changes, even in the real-estate space. Rather than settling down, many prefer to live for the moment. There are many reasons for this.

  • Many from the younger generation have student loans to repay. Approximately 8.76% of the total education loan outstandings stood at Rs. 72,336 crores, as of December 2016
  • The cost of living is much higher than it used to be. In the last 3 years, education costs have risen by 13%, housing -10%, healthcare- 14% and electricity by 8%.
  • A higher percentage of millennials prefer to spend their money on experiences (travel, electronics and gadgets) than be tied down by liabilities that last decades. A survey found that 82% millennials save for experiences rather than things like retirement, home or other family related expenses.
  • In the current market, buying homes in a suitable city is more expensive than it ever was. Renting is a more affordable option. In Mumbai alone, over 69% homes that are priced above Rs. 1 crore are left unsold.

Related: What you must know about HRA to ensure it is not rejected

Importance of securing your primary home

When it comes to buying weekend homes, it is important that you consider this option only if you have secured your primary home. Because, if your first home isn’t debt free, then there are higher chances of you defaulting on the payment of your second home. Also, remember that there would be regular expenses on maintenance of the property, and if you rent out the property, you can expect about 2%-7% of its total value as rent.

Contrary to the benefits a primary and secondary (or weekend) home offers, the newer generation prefers renting a house in a good convenient location. What is a convenient location you ask? How many times have you wondered how easy life would be if you were living close to your workplace? But, rate at which real estate prices are soaring, buying a house near the city centre is almost impossible, especially on starter salaries. And buying one in the suburbs, makes little sense considering you would spend a lot of time travelling back and forth.

You must also keep in mind that these days, many people have jobs that demand a lot of traveling, which is also a reason people prefer to rent. Additionally, most millennials want the option to move to another city if their careers require it. And even if they don’t move that often, having an apartment close to their workplace is extremely important.

Related: How to successfully rent out your home?

What does a weekend home have to do with stability?

Before investing in a weekend home, consider you current stability. Be frank about your finances, your career path and your personal stability. Are your current earnings going to remain stable, increase or is there a chance they will decrease? Are you committed to staying in the same house you buy for the next 8-10 years? If you are buying the property with your partner, are you sure a divorce or split won’t affect your instalments? If the answer to any of these questions is a no, you might have to re-evaluate your decision of buying a weekend or second home.

 

Related: Financial steps to take before major milestones: House [Infographics]

If you do plan on buying a weekend home, there are few things you should keep in mind:

  • If it’s a pre-owned home, try staying there for a few days to ensure you genuinely enjoy not just the home, but the surroundings as well. Since you’re going to be spending time here, you will not have the luxury to change locations if you get bored of the location.
  • Since this property will be a second home, it is likely to remain unoccupied for long periods. However, it will still require maintenance.
  • If your stays here will only be occasional, it is best to consider buying property that has potential for being rented out. This means it should be easy to travel to and should have basic amenities like electricity, water supply, gas etc.
  • You will probably also need to appoint a caretaker to look after your home when you’re not present there. It is also important that is has the necessary security.

You could also consider putting this same money into other investments like mutual funds, stocks or bonds, instead of a weekend/ second home. Depending on the kind of investment, you can determine the interest rate and expected returns over a specific number of years. 

Property appreciation vs returns on investments 

It is important to note that the returns you receive from a property will differ from that of investments such as mutual funds, bonds and stocks.

For instance, property valued at Rs. 15 lakhs in 2000 would be about 75 lakhs now. This shows a growth of 60 lakhs in 12 years.

When compared to other investments, bank deposits give 9% p.a. With compound annual growth rate (CAGR), we can find out the returns offered by property, annually. Here, the property grew at the rate of 13.17% in 3 years. (From Jan 2000 to Jan 2013). 
On the other hand, investing that same 15 lakhs in a large-cap fund, for the same period, could probably earn you about a crore (at a rate of 18%).

This shows that investing in some funds could probably earn you higher returns as compared to real estate in the long term.

The choice could also be affected by your risk appetite; while property has minimal risk attached to it, other investments could have a slightly higher risk level (depending on the investment). It is advisable to weigh these options before making a choice, so that you use your money in the best way possible. 

Whether it’s a primary or weekend home, consider buying an existing house rather than a property. Building your house from scratch may seem appealing, but it could turn into a nightmare if you weigh in the factors you will have to deal with. Additionally, this could be very time consuming and far more expensive.

 

Disclaimer: This article is intended for general information purposes only and should not be construed as investment, insurance, tax or legal advice. You are encouraged to separately obtain independent advice when making decisions in these areas.

 
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