.The Lavasa news that the Maharashtra government is going to take legal action against the one of it’s kind hill station on the outskirts of Pune has few of my friends having sleepless nights. Their financial planning has gone awry big time and their investment in real estate now stands as good as the junk in your backyard, at least for now.
What mistakes did my friends do ?
Property investment in a fancy weekend home ?
Around 4-5 years back when Lavasa was going great guns (read that as paid advertising big time to market the hill station), a couple of my colleagues raked up the idea of investing in a weekend home. I was wary but the lure of a weekend getaway home tucked in the mountains all for myself got the better of me, so off we went to have a look at it. It must be noted that all of us had invested in our first homes by then.
Lavasa is (was ?) breathtaking – make no mistake on that. I had a look at the place and reasoned that it was beyond me to buy and maintain a flat so far away, however good the place was.
While I declined, my friends invested in the the flats each costing approximately Rs 25 lakhs.
And as it stands today, the central government is contemplating criminal proceedings against Lavasa and its promoters because it violated the Environment (Protection) Act. All construction is at a standstill and Lavasa today represents a ghost town. Schools have closed down and students relocated elsewhere. What was once a upmarket hill station and a weekend resort is now down in the dumps.
And my friends have probably lost their investment, till Lavasa is revived and Lord knows when that will happen.
One property is enough ?
In India, if you buy one apartment, it occupies a lot of space in your portfolio – in personal finance parlance that is called allocation. One’s portfolio is suddenly overwhelmed by property and so your asset allocation is skewed towards property. Buying a weekend home will skew it more !
Many middle class investors who are earning a good salary today tend to fall prey to such investments. They end up putting all their money in the same basket. It’s a very common rule, this one and literally every news channel, advisor and newspaper would have brought this up for you at some point or the other in your life. But we still don’t heed this simple rule.
Having bought one home, ordinary investors need to think twice or thrice before they invest in a second property and I personally think a weekend home should be last on your list. Having all your eggs in the same basket is calling for trouble. Even wealthy investors need to check before investing in a second home. The basic tents of financial planning and asset allocation are valid for everyone, ordinary as well as wealthy individuals.
The urge of investing is a far flung weekend getaway home is a very charming one. I have clients who have invested in weekend homes and farmhouse plots a sum of money. They should have invested in buying their first home to stay. But they still continue to live on rent while the maintenance on the plot and weekend home still hits them each month.
So, the amount of money you spend on buying and maintaining a weekend home is massive and can easily be spent on yearly vacations probably till the times you retire ! One also needs to consider whether he/she would spend every weekend at the weekend home – I don’t think that is practical ever. So why buy one ?
Weekend homes are anyway out of the city limits and often hours away. Maintaining real estate is a huge task. If you end up with issues like my friends did in Lavasa, you would probably be running back and forth. Just to check on progress of any solution rather than spend time out there.
The takeaway is simple. Forget weekend homes and take a hard look at your asset allocation before buying a second home. If you are a Tata or an Ambani, then I stand corrected.
In retrospect, I consider myself lucky for not having invested in Lavasa. I saved a whole lot of money. I will hope Lavasa comes back with a bang. It’s a darn good place to spend your Saturday and Sunday. Also because my friends have their personal net worth wiped off massively.
Does buying a weekend home make sense ?
Radhey,
Thanks for sharing your personal experience. Yes i did read similar articles few months back. As lot of big players are involved i believe the government will clear everything and ask the builders to pay penalty/fine. Lot of money at stakes.
As for investing in second home. If people have the resources then why not go ahead and invest in the second home, instead of keeping the money idle in Savings account. Real estate will always appreciate over a period of time.
Rakesh
@Rakesh, Rakesh but don’t you think that with another house, the person’s asset allocation is skewed towards property ?
Isn’t he better off diversifying in equities as well – equities anyway return more than real estate in the long run and have less maintenance than another home.
Hi Radhey.. Very disheartening to hear about Lavasa. It had earned quite a reputation in Pune (& other neighbouring cities I guess). Had it followed the legal Acts the property prices would have been trippled or quadrupled. May it care for the enviornment & come out of this legal mess asap.
As far as investment is concerned, I think investment in second property is suitable for those who do not have any debt on them (from their first property/any other major debt), who can look after the maintenance well (should not be TOO far from the city/present home) & able to hold on for long (for maximum profit).
What do you say Radhey?
@Sudip D, Well its worth looking at if this is the case. But whey invest in property. Why not equity – the stock market has historically returned more than the real estate market throughout the world. So equity is where the investment shoudl be, I guess.
Also, with the 2nd house, the property allocation in the overall portfolio will be badly skewed towards real estate which isn’t advisable.
Investment in equity market is a risky business. So is parking all your hard earned money ONLY in equity market a wisely act? A certain portion is fine.
Isn’t second property (house/land) a good (& safe) option for investment considering to resell it at a later period (for own’s retirement corpus) or to give to your children for their bright & safe future?
@Sudip D, Sudip, investment in equity is NOT RISKY if done for the long term. The certain portion you talk about is decided on a number of factors, one of which is asset allocation.
If house/land can be considered for retirement and for kids, so can equity. Read how buying a second home impacts asset allocation :
https://www.thewealthwisher.com/2011/09/28/buying-a-second-home/
@Radhey Sharma, Ok I got your point. Read the other article about Asset allocation. You have explained it well there. Will keep these points in mind while deciding my investment avenues. 🙂
Eye opening article Radhey…..
In south also this kind of projects are going on, not sure about response. Though after lavasa, atleast people will think once.
I hope Lavasa would get some solution soon.
Diversify your investment is the key (Equity MF, Debt, Cash, Real Estate, Gold, etc in proper %) as mentioned here in so many articles.
Like you said ‘In India, if you buy one apartment, it occupies a lot of space in your portfolio – in personal finance parlance that is called allocation’.
Weekend homes are for upper class and stars…….. You can invest too, if you get space in your portfolio for proper diversification.
@Chirag, You got that right Chirag.
I personally would not buy a weekend home and spend that money sensibly as I am sure I would never use the weekend home to the best of it’s worth.
Unless you are what I would call “Super Rich”, I fail to understand why would someone buy a “weekend” home? If the investment has to be in real estate (for whatever reasons) why shouldn’t it be in a shop or a flat which can be rented out and can provide potential appreciation as well?
@Jaswinder Singh, Hey Jas, even the weekend home will provide appreciation but comes with so many cons.
As for commercial real estate, hmmm – I am not sure it is better than residential. Is it ?
From whatever I know of, I am very positive on commercial real estate and have seen numerous examples of it’s exponential growth – much more than that of residential flats.
From what I infer from the coffee table talks, Lavasa seems to be on it’s way to get the required permissions to proceed with further construction. Any takers? 🙂
@Jaswinder Singh,
Takers for the news yea, not for any flats out in Lavasa !
That is what I here as well Jas.
Some light at the end of the tunnel after all.
@Radhey Sharma, As the saying goes “…the light could that be of an incoming train”!! Beware!!
I noticed a good discussion around second home and how it can bias your asset allocation towards real estate.
Let me put a question across: Should you really consider the home you are staying in as an investment in your portfolio? Investment to me is something I can encash and enjoy or achieve financial goals. Now I cannot sell my home and enjoy the money while living on streets. So, does it make sense to include it in the portfolio at first place?
In my opinion buying your own home can be a goal but not an investment. Yes, reverse mortgage could prove it otherwise but that option is yet to be explored in India where sentiments and inheritance are attached to the home.
Buying another property in addition to a home I am living in should be considered as a first investment in real estate. So, it makes sense to me to invest in a so called “second home” for investment purpose, no matter how small the investment is. Without this I’d mark real estate allocation in my portfolio as zero, which is probably not a very good thing to have.
@Vivek K, You are correct Vivek, 1st home is not to be considered. See, you already know everything !
@Radhey Sharma, I thought you would throw in some challenging questions for me. 🙂
If I am right about this where does it leave the article on buying a second home? Isn’t there a contradiction? Sorry but I am trying to understand the rationale behind real estate investments.
@Vivek K, The bottom line is a second home should not necessarily be an option, one is better off with equity.
If you have surplus funds and if you think real estate can generate better returns the Stocks/MF then it makes sense to invest in real estate. But over the long term on an average returns generated by real estate is between 8-10%.
@Rakesh, But for proper diversification shouldn’t real estate be in your portfolio? You can’t just invest in equity.
I don’t know from where you got the figure of 8-10% but people who bought land 10 years ago have almost gained by 50%. Even my apartment I bought 3 years ago has already appreciated by 20%, although I don’t consider it as an investment.
@Vivek,
I was talking about real estate returns over 20-25 years. In short term yes you will get good returns. I have seen people getting 100% returns in 3 years time.
@Rakesh, So when you get such good returns sell, book profit and reallocate the money. You would do the same for any investment, you are not going to invest in equity and forget it for next 25 years.
@Vivek,
Rightly said depends on my goals. I have invested in equity for different goals, say 5 years, 20 years. If after 5 years my goal is achieved then i will definitely withdraw the funds and use it. As for the goal which is for 20 years, i will not touch the money.
@Rakesh, Even for 20 years goals I think periodic review of an asset is required and reallocation if situation demands otherwise you may get a surprise at the end of it.
@Vivek,
Bang on. The 2008 crash taught me a very good lesson.
I agree real estate in long term can’t yield more than 10%. If you consider specific spikes in real estate then it may offer biased figures like 100% in 3 years. Around 2005-2007, Pune real estate was kind of unusual spike and any analysis which includes this period will give a different picture. Baner, Pimple Saudagar etc might have given 200% return in 3yr period but that is once in lifetime phenomena. These places are more or less in stable growth of 10% after 2007.
I agree real estate in long term can’t yield more than 10%. If you consider specific spikes in real estate then it may offer biased figures like 100% in 3 years. Around 2005-2007, Pune real estate was kind of unusual spike and any analysis which includes this period will give a different picture. Baner, Pimple Saudagar etc might have given 200% return in 3yr period but that is once in lifetime phenomena.
Exactly and that is why people get lured by the ‘real estate killing’ phenomenon and rotate it very often – but once they are stuck with it, they realize their mistakes.
This is our first hand experience of Lavasa, Pune, India. When one decides to invest in Lavasa you should not expect anything that we so take for granted in a normal Indian City.
Lavasa is a hotbed of City Sponsored Terrorism. I am sure you would have read enough news articles of them taking away tribal lands and villagers being cheated of their properties. Now a new trend is emerging in Lavasa. People who have invested in residential properties are being harassed and made to pay some obnoxiously high charges under various heads. In addition, no one is allowed to make legal income from their second-home property. Lavasa intervenes in every transaction of every residents. You would be given a red carpet welcome when you are investing but soon would be made to feel as if you are a criminal. For sure you would feel cheated sooner than later, as we have experienced ourselves and have seen many residents feeling the same. We have personally experienced mine and many other’s investments in Lavasa being taken over forcefully, with the use of guns and other weapons by Lavasa Corporation and have also known of locks of many personal houses of many residents being changed without the prior knowledge of the owner. The house owner is then forced to travel to Lavasa, cough up a tidy sum to get the house keys back. Then they are threatened that utilities would be cut-off should they disagree with Lavasa ever.
Lavasa Hill City has also turned into a place where businesses are cheated and their assets and properties taken over forcibly by Lavasa Administration. In a democratic India , Lavasa is a unique city where fundamental rights of residents who are owners of businesses, villas, apartments and houses are massacred at will with full support of the Top Management. The Special Planning Authority – SPA – given to Lavasa is being used against the citizens at will. It is this Special Planning Authority that is the reason for such power going to the heads of Lavasa Management.
In the documented words of Scot Wrighton, the American City Manager of Lavasa ” I have grown frustrated as I deal with a business climate poisoned by the government and a lazy media that depicts Lavasa as a place that is just a city for the wealthy, where environmental norms are flagrantly violated, and where we steal villager land.” What a wretched outlook to India.
Remember that Lavasa is controlled by private security guards who are actually goons employed. No one dare raise an issue in Lavasa else the City management sends goons dressed in security uniform and takes over private properties of the complainer. Terrorizing people, manhandling them, profiling them, issuing threats of dire consequences and trailing people, all happens in Lavasa. That is Lavasa for you.
We have invested in Lavasa and seen all our investments evaporate. Beware, before you meet the same end that we have met. If you are investing in Lavasa check with many who have done so and still waiting for years to get possession of their property. There are hundreds, if not thousands of investors who are in various stages of conflict with Lavasa. A great mutiny is on the anvil.
Lavasa is place where the administration works against you and you have no one else to complain because they have absolute powers. Lavasa is a one way street, you can invest here by would not find any buyers later. Yes Lavasa helps – they simply send goons with guns and take over your property.
For us we would like to recover our hard earned investments and move on. Please help us recover our investments.
Hello Radhey, chanced upon this blogpost three years after it was written. Wonder if Lavasa has emerged from its legal wrangle. Thanks for the advice . Property investment is fraught with other dangers apart from the ones investors have faced in Lavasa. Selling of property that is unencumbered is also not an easy task. In India, there is the whole “black money white money” angle, and one has to constantly keep visiting/checking on it. Also, each place has its own regional peculiarities that affect its price and demand. So, how does the uninitiated enter the world of equity? Because, due to stories of market crashes, it is considered unsafe
Hello Radhey,
What if some body is not interested in staying in hotels for a vacation, He wants a home away from home and wants to eat home made food for health reasons ?
Hi, Deepak… This is Madhupam responding as now I am managing this blog…
The thing you mentioned is a niche need and is getting noticed. I would not name but certain hotel chains have come with a concept of service apartments where you get kitchen and supplies to make your own food. You can also order the prepared food as maybe kids would like to eat whatever they want. Point in the article is would someone who is not a frequent weekend traveller, should buy a property just to diversify the investments?