Tempted to buy a holiday home?

Wait, here are some key concerns to take note of before investing in tourist destinations

“How wonderful if I could buy a second home in this scenic spot!” How often have you caught yourself thinking on these lines?

It’s natural to wish so because rather than look for a hotel, having one’s own place to stay in while on vacation or pilgrimage is extremely appealing.

However, the practical aspects of this need to be considered before you get carried away.

Buying options

Buyers are typically drawn to popular tourist destinations such as Goa, Wayanad, Ooty, Coorg, Shimla and Kasauli. Vacation homes out of the country are also an option for the well-heeled. What attracts buyers is the serene location with good weather, infrastructure and potential for rental income.

Pilgrimage sites such as Tirupati and Haridwar are also popular. Still, weekend homes — scenic places that are closer to the city — appear to be most attractive. For example, Lavasa, Lonavala, Alibaug and Igatpuri near Mumbai, Mahabalipuram near Chennai, and Nandi Hills near Bengaluru are some regular attractions.

Prices can vary from a few lakhs to many crores. For instance, homes in Coorg typically come with a few acres of coffee estate plantation and may cost well over ₹1 crore. Villas are popular in many locations such as Goa and prices may run to multiple crores. Price tags are also high in mountain locations such as Shimla and Kasauli — villas in DLF’s project in Shimla were priced at ₹6 crore.

However, apartments or homes in pilgrim centres or smaller get-away locations have a more affordable price tag. Likewise, homes with farms are also an option and, depending on the location and size, tend to be priced below ₹50 lakh.

Factors to consider

Before you decide to buy, there are a few key factors to consider. Be clear on your reason for the purchase — is it for own use or as an investment ,with expectation of rental return?

If it is for self-use, you must weigh how far you wish to travel and the travel costs. A place that is too far away or difficult to reach may remain unused. Also, if there are only limited activities for the family, there may be less inclination to pack up and go.

If your intention is renting out, look at the tourist seasons in the location, which determine the rental demand. Renters’ property type preference, whether home-stay or weekly rental of the full property, must be evaluated.

As an investment property, the potential for growth, based on the local economy, infrastructure development, government policy and plans to promote the location as well as likely supply that is expected must be ascertained.

The safety of the location and social infrastructure such as shops are also important. Be sure to know the ownership rules. States such as Himachal Pradesh have some restrictions on outsiders owning land.

Due process

It helps to follow due process, rather than decide hastily. One simple thing to do is to rent a place and visit during different seasons. This can help you know the local issues, such as water shortage, crowd and weather, a little better. Stay for a longer duration to ensure that your location choice is not isolated and far from service availability.

You must also be realistic about the costs involved — one-time such as furnishing and on-going expenses. Budget for taxes, electricity and other maintenance costs. City dwellers may also not realise the need for insurance, for flood or fire, based on the location. You may find that expenses due to climate-related issues, such as damage due to corrosion from salt in beach-front homes, may turn the home into a money pit.

Rental income, projected high when you are a tenant, often ends up lower. Occupancy rates may also be low and there are usually many costs associated in renting out. For example, cleaning, wear and tear of equipment and furnishing, and costs involved in finding a tenant, may take away 50-60 per cent of your income and dampen your net return.

With a slow property market, make sure you do not walk into a trap. Returns may not be high or, as in the case of Kasauli in Himachal Pradesh, property prices may fall.

Also, you may feel compelled to visit or use the place just because you own a home. A rent-versus-own analysis may show that you may have been better off as a renter.

The writer is co-founder of Rana Investment Advisors

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