Income Property or 2nd Home?

Question

I am going to buy a property in Arizona. I can buy it as a second home for 20% down, then rent it out weekly. My bank will allow it as long as I live there part of the year. Or, I can buy it as an income property with 25% down and use it the same way. It seems like it would be better to buy it as an income property for the tax benefits, what do you experts think?

John E. · Answer

Account Closed Don't look at that 25% as extra money you're spending on a house. Remember that's 5% in instant equity in real property you will own and not have to pay interest on. See the difference in perspective? Also, Naseera hit the nail on the head when mentioning the tax advantages.

Note~ I'm not an expert, so by no means should you take tax, legal, or investing advice from me as truth. There are a lot of people on the site who are waaayyyy more qualified than me in those areas. :)

Dennis Nemitz · Answer

Thanks Ryan. It is off of Dobson.

Ryan Swan · Answer

@Dennis Nemitz The new Cubs complex on Dobson, or the old Hohokam stadium? I'm not sure what the out of town draw is for Cubs fans, but if it's walking distance to the new stadium you'll probably get some takers.  Other than spring training, however, it's a little out of the way for vacationers looking to partake in the upscale shopping, nightlife, and golf around downtown Scottsdale.

That's also a nicer part of Mesa, and still relatively close to downtown Tempe and ASU campus. I'm sure you could also rent it out longer term no problem.

Dennis Nemitz · Answer

Ryan S,

It is near the Cubs Stadium. Do you think it will rent well there?

Colleen F. · Answer

Is there also an interest rate difference?   Here  I found second home interest rate was more favorable then the investment rate and you can always put more down.  Keep in mind you will need to budget reserves and furnishing the unit. You can always pre-pay the loan by 5% if at then end of the day you have that money to spend but do make sure you can carry with your reserves because  you  won't necessarily get instant renters.

Also if you are asking not just about loans but about treating it as an investment property for taxes what you are talking about is mixed use once you use it more then 2 weeks a year.  Before you go too far understand this part of the tax code as it may influence your strategy. you may already know this but I thought it is worth mentioning.

Heath S. · Answer

@Dennis Nemitz

I would go with the 20% down unless you want to spend the extra 5% to have a lower monthly payment.  As far as returns on the property, you will have a better cash on cash return with less money down.  And I would consult an accountant, but I'm pretty sure that either method would allow you to write off the interest and depreciation on the property as an investment property.  You would also be able to write off any furniture and housewares that you purchase for the property over a period of time (I think 5 years).  The distinction of 2nd home(vacation house) vs investment property is simply a distinction that the mortgage lender needs to make to qualify you.  An investment property has more strict guidelines, therefore you need a larger down payment.

Hope that helps!

Ryan Swan · Answer

When you say "rent it out weekly", I assume you mean make it a short-term vacation rental? If so, those types of properties are in high demand here (phoenix metro) and command a price premium (assuming it's a nice property in a desirable tourist area). You'll obviously have to fully furnish it (furniture, tv, bedding, linens, kitchenware, etc) if it's a vacation rental.

Naseera Mohamed · Answer

I'm Certainly no expert but to me it seems that with a 5% more in down payment u will get more income which is what it's all about! isn't it?