The Economics of Second Homes: Breaking Down ROI, Appreciation & Rental Yields

Second Homes / Vacation Homes / Farm Houses, you can call it whatever—have always held a special place in an Indian's heart. A place that is 1-3 hours away from your residence and located at a place with cleaner air, better weather, and a larger space where you can enjoy the weekend with your friends and family. Historically, owning a second home was always considered something that only HNIs (High-Net-Worth Individuals) could afford and something that would be a family asset that gets passed down to the next generation.

With the growth of the prop-tech industry, people are realising two facts about second homes:

1. Second homes are a great investment asset
2. Second home ownership is no longer just for HNIs

Let's break this down, step by step based on an interview with Mananki Parulekar, Co-Founder, Claravest Technologies Pvt. Ltd.

Second Homes Are A Great Investment Asset

A person or a family owning a second home usually ends up using it twice or three times a month. The rest of the time, the house is locked and unused. If the same house is put up for short-term rentals, that unutilised house becomes a great investment asset that can fetch great returns.

Second homes in top holiday destinations or those near tier-1 cities can provide a rental yield of around 6% to 8%, depending on location and asset amenities. These returns are in par with owning a grade A commercial property, which could cost you a lot more than a vacation home and one that you won't be able to enjoy on your own.

Furthermore, based on the location of the second home, the asset also appreciates year over year. Generally, if second homes are located in destinations like Lonavala, Goa, Ooty, Jaipur, Shimla, these assets appreciate anywhere from 9% to 12% year over year.

Considering the annual rental returns and property appreciation, a second-home owner can earn an internal rate of return (IRR) of around 16% to 18% annually. This could make the second home asset one of the top-performing assets in one's portfolio.

Second Home Ownership Is No Longer Just for HNIs

Second homes that can earn a high rental yield require a significant investment in terms of money, time, and energy. These homes could cost upwards of Rs. 2 crores and would need further investment for property maintenance, staff management, property rentals, and managing guests' expectations.

With the growth of fractional real estate ownership, people can enjoy the perks of owning a second home without having to deal with the cons.

People can co-own these second homes with other like-minded investors and own a fraction of these luxury properties starting with as low as Rs. 20 Lakhs. Fractional ownership platforms partner with top property managers and handle rent generation, property maintenance, and rental distribution among investors. After co-owning these homes for a specific period, fractional ownership platforms will also facilitate their resale, allowing investors to earn property appreciation and reinvest in a new second home in a high-growth market.

People can now have a slice of luxury, high rental income, property appreciation, and enjoy a few nights to themselves in their fractionally owned second home.

Economics of fractional ownership in second homes:

- Gross Annual Rental Yield: 8% - 9%
- Net Annual Rental Yield (after deducting property management fees, fractional ownership charges, and operating expenses): 6% - 7%
- Annual Appreciation: 8% - 12% (based on the location)

Things to Consider Before Investing in Second Homes

A couple of things to consider if you are investing in a vacation home, either full ownership or fractional ownership, are:

• Make sure an expert manages the property. For high rental returns, it is crucial that your property manager take care of your home and maintain its quality.
• In the case of fractional ownership, ensure that the platform has done its due diligence regarding the second home and its location
• Understand the ownership structure and your rights as a fractional owner.

A second home is a very up-and-coming investment asset class in India, and by understanding its nuances, it could easily become one of the strongest asset classes in your investment portfolio.