I’m often asked if it is wise to take on a mortgage while buying your second home. I think most people expect me to say what they expect me to say – NO. However, I wish life was that easy and I think I would not be honest if I were to answer this question without due consideration of the person.
Before telling you what the major factors are that influence my advice, let me share the following:
1. Many second home developments are not eligible for mortgages or are subject to lending only 40-50% of the value of the property.
2. When looking to buy a second home for income generation, you must look at the seasonality of the property and its proximity to major cities such as Mumbai, Delhi, Chandigarh, Pune, Bangalore that can send a lot of guests your way.
3. When looking to buy a property, it is always best to budget for some enhancements to the property and upgradation to ensure it is comfortable for guests.
4. Do a very careful analysis of the economics and how much you will have to spend on staff salaries, how the bedrooms need to be arranged, etc. so that you can maximize your revenue.
As such, my feeling is that if you are able to get a property that is pre-approved by the banks, able to accommodate multiple people within the property at the same time and which you are fairly confident of refurbishing and starting to market quickly, you should be willing to take on that mortgage. This is because it will leave more capital in your hands for any emergencies and it also will ensure that your earnings from the property are offset by the interest payments thus reducing your tax burden.
Borrowing from a bank will also ensure that the bank has done their verification of the land records and puts you in a stronger position even if you don’t have to spend any money for the same. Remember also that India has many long weekends and by marketing your property effectively you might be able to make most of your payments through just these days.
So in closing,
1. Try to take some financing so that the bank involved checks the documents and the legality of the property.
2. Don’t lose time. Try to ensure that the mortgage is disbursed only towards completion of the project.
3. Maximize your earnings by ensuring that the floor plans are such that multiple guests/ families can visit at the same time.
4. Focus on evergreen properties where the tourist season extends to at least 9 months of the year. This puts less pressure on you as you have a longer period to generate income.
Finally, wish you all the best. Home loans ensured quite a few people could become home owners. We also feel mortgages if used smartly can be a big boost to your earnings.
