A home is the first investment one should make. Those are not my words but Peter Lynch’s. So to honor the veteran you did what he preached but then the itch of buying a second home got to you. What do you do?
Most of the investors tend to get inclined towards real estate more as they can literally see their investments – it’s tangible, easy to understand and invest in – unlike stocks which they run after on tips and recommendations and eventually lose money.
But does Buying a second home make sense at all ?
One home asset allocation
Consider a middle class investor who already has a home which he is using for his residential purposes. With the low awareness of financial products and investment classes, he would already have invested in a slip shod manner across equities and debt.
In most of the cases, his exposure to equities would be less and to fixed income instruments would be more.
In such a scenario, considering his residential home in his asset allocation, his portfolio is suddenly to a huge extent occupied by property. Let us see with an example.
Consider an investor who has purchased a two bedroom apartment and has the following assets.
| Asset Class | Market Value (in Rs.) |
Allocation (in %) |
| Liquid | 100,000 | 2% |
| Debt | 500,000 | 9% |
| Gold | 25,000 | 0% |
| Equity | 150,000 | 3% |
| Real Estate | 4,500,000 | 85% |
| Total | 5,275,000 | 100% |
His asset allocation will look like this :
As you can see, his asset allocation is more towards real estate. That is akin to putting all your eggs in the same basket. If the property prices are to go down south, his personal net worth is going to erode. Now that is not intelligent risk management.
But this generally is the case with most middle class Indians. They have so less corpus in other investment avenues that buying an apartment skews their portfolio towards property.
Two home asset allocation
So given this scenario, do you get an idea what buying a second home will result in ?
Suppose the new home is worth 50 lakhs (50, 00,000 Rs), let us see what the new allocation will look like.
| Asset Class | Current (in Rs.) |
Current (in %) |
| Liquid | 100,000 | 1% |
| Debt | 500,000 | 5% |
| Gold | 25,000 | 0% |
| Equity | 150,000 | 1% |
| Real Estate | 9,500,000 | 92% |
| Total | 10,275,000 | 100% |
Real estate is the sum total of both the homes, one Rs 45,00,000 and the second home at Rs 50,00,000/-.
Graphically, this is represented below.
Buying a second home has shot up the property allocation to 92% from 86%. That is not good at all. Your baskets are getting filled by the same types of eggs !
Many investors argue that they want a second or a third home for many reasons. Many cite the reason that they want to invest in two homes for their two daughter’s future.
The solution
A better approach would be to go for long term investing in equities and then cash out to buy the house in the future if required. This is advised because equities have historically returned more than properties over a long period of time. Also, investing in stocks and mutual funds will help increase your corpus into other eggs in the basket thereby making a well rounded asset allocation.
So suppose the above investor were not to invest into a second home and instead put the down-payment of the second home into equities – (assumed) 20% of 50,00,000 Rs. His asset allocation would be like this :
| Asset Class | Current (in Rs.) |
Current (in %) |
| Liquid | 100,000 | 2% |
| Debt | 500,000 | 8% |
| Gold | 25,000 | 0% |
| Equity | 1,150,000 | 18% |
| Real Estate | 4,500,000 | 72% |
| Total | 6,275,000 | 100% |
which graphically looks like this :
As you can see, the equity exposure has shot up and the real estate allocation has gone down. Doing this over a period of time will get your asset allocation into a proper shape.
Buying a second home – Wrap up
Remember equities are easier to manage – all you need is a DEMAT account. Your apartment needs to be maintained over a period of time and needs more maintenance than you can imagine.
Almost all of our clients beyond the age group of 50 have primarily invested heavily into two asset classes – debt and property. When we advise them to lay different kinds of eggs, they are hesitant. At so late an age, people don’t like changes – they are married to their investments but when we explain them the pitfalls from an asset allocation perspective, they understand.
The best example of why over exposing yourself to buy a second home is a disaster is the United States housing bubble that left people with heavy foreclosures.
Buying a second home became such a huge a craze then, that homeowners thought buying more homes would make them rich when the homes appreciated in value in the future. The project developers, banks, lenders, property agents were caught in a spiral of flipping homes till the homeowner himself found himself left high and dry when his homes came crashing down !.
If only they had stuck to their asset allocation.
That’s a good one. Well explained.
Hi Radhey
Thanks. I stumbled upon this post and found it very useful and valuable. I also urge my friends to stick to asset allocation but it is very difficult to change the mindset – especially people who invest everything in buying flats in a highly leveraged way, dont understand the risks they are exposing themselves too – partly the reason behind it is sustained underperformance of other asset classes, and somewhere the govt. making it difficult for people to invest (read: mutual funds)
your point is well taken and should hopefully be an eye-opener for investors.
Abhinav
Getting second or third house can be risky if we do not know and study the markets deeply. Radhey has well given us good tips about it. Thanks for this, will share this info.