Is Buying 2nd house wise decision or not?

POSTED BY seeni_pv ON February 19, 2014 6:01 pm COMMENTS (15)

Dear Sir(s),

My new job location will be in Pune. I have an individual house and 3 plots in Chennai & its surrounding area. My wife suggests me to buy a new flat in pune, sighting the reason that anyway we will be paying rent around 10~12k/month so an EMI for a new house won’t be too far from the rent. In addition she said when we want to move to other city again in 5 years we can sell it with handsome profit due to the phenomenal appreciation of real estate property in India.

My side of argument is,

First of all I’m not a fan of buying flat / apartment, I’m more inclined towards buying individual house where the ground also belongs to us. But considering my wife’s suggestion that the new flat will be purely for investment purpose, I quickly did some rough calculation and found below results. Please correct if I’m wrong.

Scenario for buying new flat in pune (values are assumed):

Flat value (incl reg, stamp paper, brokerage) = 60 + 5 lacs

Down payment = 25 lacs

Bank loan (for 11% fixed interest for 20 years) = 40 lacs

EMI (approx.) = 37 K (4.4 lacs /year)

Total payment for 5 yrs = 22 lacs

Total principal paid @ 5 yrs time (approx.) = 5 lacs (Outstanding principal = 35 lacs)

Value of the property after 5 yrs (@12% CAGR)= 96 lacs

Profit I may get = 96 – 35 (loan) – 17 (% paid) – 19 (20% tax)

= 25 lacs

So selling our property after 5 years yields me ‘ZERO’ OR ‘NEGATIVE’ profit considering Utilities, Maintanence & property taxes we may have paid during that 5 years.

If I put that same 25 lacs in a FD (@10%) after 5 years it would become 37.5 lacs(12.5 lacs profit).This additional 12.5 lacs would pay our Rent & Utilities. We may consider ourselves, we lived in an apartment without having to pay any Rent or utility bill for 5 years, plus I will also get tax benefits for my HRA.

So my verdict to my wife is that buying a new flat in pune is NOT a wise decision. Eventually she bought my story (which won’t happen quite often).

Please correct me if I’m wrong.

Regards,

Poovannan

15 replies on this article “Is Buying 2nd house wise decision or not?”

  1. akgc2 says:

    Dear Poovannan
    Here you will find some nice details about Capital Gain on selling of property in India

    http://care2earn.blogspot.in/2013/06/capital-gain-tax-on-selling-of-property.html

    and below the cost inflation index (CII) starting since 1981 till 2014.

    http://finotax.com/income-tax/info/capital-gain

    This will help to understand what is LTCG and what is indexation on LT capital gain.

    About 2nd House my knowledge is that :

    if you own 2 flats you can declare one as self occupied and another as rented. You get the tax benefit on the entire interest paid for the house which is rented but at the same time the rental income is added to your income for taxation. However not the entire rental income is taxable there are few standard deductions plus deduction for annual property tax paid to Govt on the property.

    I will wait for experts to comment on this as I have limited knowledge on this especially when property is a joint property.

    Regards
    Arun

    1. seeni_pv says:

      Dear Mr.Arun,

      Thanks for the links.

      About my query, May be i have to Modifiy it little bit.

      1, Assuming that i buy a new flat in pune (in my wife’s name) whcih will be our second house and we are oocupying it. Do i get complete tax exemption on the interest paid since it is our 2nd house?
      (please note that 1. our 1st house which is in chennai is in my wife’s name. 2. It is not rented out, my parents are living. 3. The loan we took to built our 1st house has been already closed)

      With Best Regards,
      Poovannan

  2. rahul123 says:

    Just to add on –

    1. As the price of flat increases, the liquidity will be an issue….you may not able to sell the flat at current market rate (at that time).

    2. Also you might move to other city before 5 years (if opprtunity is available)

    Thanks,
    Rahul

    1. seeni_pv says:

      Dear Mr.Rahul,

      Thanks for your input.

      1, Please kindly explain what do you mean by ‘Liquidity will be an issue’
      2, Your are right. But i’m in a contractual agreement for next 3 years which is coming under long term capital gain.

      With Best Regards,
      Poovannan

      1. rahul123 says:

        Hi Poovannan,

        Liquidity means – when you want to sell your flat , you should able to sell it immediately (0-6 months), without much variation with current market rate.

        e.g.
        If you buy a 1000 sq flat @ Rs 5500/sq ft, after other charges assume th total cost Rs 60,00,000.

        If after 5 years the price becomes Rs 8000/Sq ft, then you should able to find the buyer who is ready to buy it at that rate….(total cost app Rs 80,00,000+ Stamp duty, registration, other charges).

        Generally with such high prices, the wait period (to sell flat) is more and negotiations are more. Hence you might not able to sell it at prevailing rate (within your time frame).

        Thanks,
        Rahul

        1. seeni_pv says:

          Dear Mr.Rahul,

          Thanks for the explanation. What you said is entirely true.
          but at the same time, 5-6 Years back i would have not even dreamt about buying a flat worth 60 lacs.

          Regards,
          Poovannan

          1. rahul123 says:

            So, what is your dream telling about next 5-6 years?

  3. akgc2 says:

    Another point I forgot to mention that @12CAGR the value of property will be 1.05 Cr not 96 Lac.

    Here I am taking initial value as 60 Lacs only (Not 65 Lac)

    60*1.12*1.12*1.12*1.12*1.12*=105 Lac

    1. seeni_pv says:

      Dear Sir,

      Thanks for your inputs.

      1, I agree.
      2, Thanks correcting my understanding on applicable capital gain tax only for profit made( profit = selling price – 60 lacs). Please kindly provide more details about ‘indexation benefit for LTCG’. This is completely new information for me.
      3, Hope you don’t mind explaining why am not eligble to get HRA benefit? Sorry that i haven’t paid IT in India for past 7 years & before that either i paid no or meagre tax, hence i’m not familiar with IT structures yet. Jagoinvestor & its members are doing fantastic job in teaching beginners like me. Hats off.
      4, Thanks for correcting my mistake.

      Now it appears, my wife is right about investing in a new house 🙂 But i have to wait for Mr.Rahul’s explanation about issues involving in selling property.

      New query:
      1, Assuming that i buy a new flat in pune whcih will be our second house and we are oocupying it. Do i get complete tax exemption on the interest paid since it is our 2nd house? (please note that our 1st house which is in chennai is in my wife’s name)

      Vielen Dank!
      Poovannan

      1. ashalanshu says:

        Dear Seeni, the property value for you is 65L Rs. hence Capital Gains ‘ll be counted from 65L Rs. not 60L. Please read old articles in main site to understand Capitqal Gains and indexation. Still if you are in dark, come back here and we ‘ll discuss.

        By not eligible for HRA benefit means – as you are living in your own house, hence HRA ‘ll be taxable to you. 🙂 Interestingly due to this HRA, the Tax benefit on your home loan ‘ll come down.

        May I know your supposed basic salary and HRA component in your salary?

        Also indicate your yly gross income. In case you want to keep it private, please discuss the issue over personal E-mail.

        Thanks

        Ashal

  4. akgc2 says:

    Dear Poovannan
    Here you have missed 2 items in the calculation.

    1. Rent you save in 5 Years. If current rent is 12K per month and increases at 10% every year you will pay Rs 8.78 Lac as rent in next 5 years.

    2. Rs 19 Lac as 20% tax is not correct. Tax is not on entire sale proceed but only on the profit made. Also you get indexation benefit for LTCG. Indexation generally comes to 8-9% per year (Based on Historical data). Hence the actual tax could be just nil.

    3. You wont get HRA benefit but you will save Rs. 45K per annum on income taxes if you fall under 30% tax bracket.

  5. ashalanshu says:

    Dear Seeni, all over India, real estate prices are in bubble zone. when this bubble ‘ll burst, I can not tell. To opt individual house over flat is matter of personal choice.

    Thanks

    Ashal

    1. seeni_pv says:

      Dear Mr.Ashal,

      Thanks for your reply and appreciate your patience.

      Regards,
      Poovannan

  6. ashalanshu says:

    Dear Seeni, whenthe rent is too low and price of the house is very high, it’s advisable to live on rent. Based upon your calculation it seems living on rent is a wise decision.

    Thanks

    Ashal

    1. seeni_pv says:

      Dear Mr.Ashal,

      Thanks for your prompt reply. Hope the numbers assumed in my above calc are close to realistic.

      What is your opinion about current real estate prices in Pune? Highly inflated? or some what reasonable? comapred to chennai/Bangalore.

      Do you also agree with my opinion that induvidual built house always better than a flat?

      With Best Regards,
      Poovannan

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