Second property: Gains from tax-breaks

Today, home buyers are younger than they were before. Most buy their first homes while still in their 20s. And, in no time, many start contemplating a second property, either as a vacation home or to be let out. This is not a new trend, but has been recognised as a growing market in the past few years.

As an investment, real estate is considered illiquid. But the main advantage of buying a second home is the tax benefit you get on a second home loan.

Investors can look at either residential or commercial property depending on their requirement.

Says Rajesh Saluja, managing director and chief executive officer (CEO) of ASK Wealth Advisors, “Comm-ercial properties offer higher rental yields, compared to residential ones. But capital appreciation is higher in residential properties.”
 

TAXATION ON SECOND PROPERTY

• If the house is rented out, the income from it will get two deductions: Property tax paid and interest payout 
• The rest of the income will be added to your ‘income from other sources’ and taxed
• If the house is not rented out, the municipal rate of the area will be considered to be the rent. After the above deductions, the income will be taxed
• In case of a loss after the property tax and interest payout, the taxpayer can, if he wishes to carry it forward, offset it against gains from only a housing property any time in the next eight years 
• Alternatively, the loss can be set off in the same year against any other gains in that year

When looking to invest in real estate, you first need to know how much money you can put in, your risk appetite and time horizon. So, those with a smaller corpus should look at small apartments or land plots. Those with larger capital base can consider commercial property, explains Amit Goenka, national director, capital transaction, Knight Frank India.

The other factor to keep in mind would be the time period for which you are looking to lock in the money. Those who can afford to hold on to their investments for longer periods should go for a plot of land, as the price appreciation in this case needs longer gestation period (over five-seven years). If you can’t wait that long, look at developed residential or commercial property as the price appreciation is faster (typically two-three years).

“Investment in residential property would offer more capital gains. The rental yields are not much (two-three per cent of the gross initial investment). As against this, retail or commercial property offers returns of 10-14 per cent,” says Goenka.

Conversely, the residential property segment is not attracting many investors (other than for self consumption) as prices have gone by 200-300 per cent in last five-six years.

There is, at present, heightened interest among the ultra-high networth investors, who can invest in excess of Rs 10 crore in pre-leased commercial properties, especially in metros like Bangalore, Mumbai or Chennai, says Prateek Pant, director, products & services, RBS Private Banking. These properties offer yields in excess of 10 per cent and have good quality tenants who are locked in for a considerable period of time. “The opportunities for capital appreciation and high yields on commercial property make this an attractive option,” he said.

While investing in commercial property, the factors to be kept in mind include location and demand for property in that area.

Similarly, while investing in residential property one needs to look at the physical and social infrastructure — are there new malls or new flyovers coming up, how is the infrastructure like road connectivity or metro lines, and so on. Reason: These will lead to capital appreciation in this case.

Investors should watch out for clear ownership of property, ability to physically possess the property and clearances of necessary regulatory titles. It is better to invest in ready properties that have tenants, as investment in an underdeveloped property is riskier.

Investors must consider factors like location of the property, infrastructure and commercial activities like town planning, and the existence of ready consumers for the property, advises Goenka.

Quality of builder, location of the asset and tenants are important considerations while investing in commercial properties, says Pant. “Choose an A-grade builder. The tenant, too, should be good MNCs or Indian companies,” he says.

However, direct investment in property requires investors to do the due diligence, look for buyers or tenants, registration of the property and so on. “Investment in real estate is for the long haul and should not be seen as a speculative deal. Investors should understand the fundamental of the property and not get taken in by sales pitch,” says Goenka.