Investment Property vs Second Home: What's the Difference?

If you’re planning to buy real estate, you should first set some clear goals. Decide whether you want to live there or make a profit. This is very important. Even though there’s a common misconception that second homes and investment properties stand for the same thing, this couldn’t be further from the truth. And there are many different aspects you should consider before buying. For example, there are significant differences in the financing and taxation of these two real estate types. Therefore, researching this topic will help you make the best decision. So, let's find out the difference between a second home and an investment property.

The difference between a second home and an investment property

It's enough to look at the definitions of a second home and an investment property to make a distinction between these two concepts:

• - A second home is a property you buy and intend to live in for part of the year. According to the legal definition, you should live there for at least 14 days per year for it to qualify as a second home. And you can have multiple second homes. Usually, people buy these properties as vacation homes and rent them out for the rest of the year.

To better understand the difference between a second home and an investment property, consider them in terms of vacation home vs. rental property.

1. 
   - An investment property is a piece of real estate you buy without the intention to live there. The main objective, in this case, is to generate income. You can make money by turning it into a rental property or flipping it.

Now that you know the difference between a second home and an investment property in terms of definition, let’s look at some other differences.

Financing differences between a second home and an investment property

You'll likely need to obtain financing regardless of why you're buying a property. And while it's relatively easy to get a loan for a primary residence, this doesn't apply to all real estate types. For example, second homes are considered riskier for lenders because people will quickly give up a vacation home if needed. And the same goes for investment properties.

Nevertheless, it’s easier to qualify for a second home loan than an investment property loan. But be advised that some lenders might require you to sign a Second Home Rider. And this document can include provisions that forbid you from renting the property when you’re not living there.

But don't worry, there are some advantages to investment properties. For example, you can qualify for an investment property loan using some of your anticipated rental income. If you find the right lender, your other debts might not even constitute an issue. The lender will only be interested in the anticipated cash flow.

Now, you should also be aware that it’s more expensive to finance these types of properties than it is to finance a primary residence. Nevertheless, you’ll likely get a higher loan rate for investment properties than for second homes. And the main reason for this is that lenders consider them riskier.

Lenders consider second homes and investment properties risky, so obtaining a loan is not easy or cheap.

Down payment differences

As previously mentioned, investment properties are considered riskier than second homes. Therefore, lenders usually require a larger down payment for investment properties. Specifically, you might have to put down 10% of the sale price for a second home. However, you'll likely have to put down around 15-25% of the sale price for an investment property.

Taxation differences

When it comes to taxation, you should always research the tax benefits that apply to your property. For example, as the owner of a second home, you might be able to get a tax deduction for the interest on the loan. Or, if your loan agreement doesn’t forbid you from renting out the property part-time, you might be able to deduct some of the expenses.

Still, investment properties provide more tax benefits than second homes. And the main reason for this is that they are perceived as investment real estate. So, you report the income, and you can deduct almost all the expenses. You can include costs related to maintenance, utilities, mortgage interest, insurance, etc.

Research and find out what tax deductions you can apply for.

Tips for buying a second home or an investment property

Now that you know the differences between second homes and investment properties, you can begin your house hunt. Well, maybe not that fast. There are many other things to consider before buying real estate. For example, the consultants from Roadway Moving advise you to carefully choose the location. Finding the right neighborhood is critical, even if you've already made up your mind about the city. And it’s not just about your convenience. This will help you make a more significant profit if you choose to sell or rent the property subsequently.

The property amenities are also essential. If you're planning to buy a vacation home, you want it to provide you with all the comfort. For example, if your primary residence is an apartment in the heart of the city, you might want your second home to be a big house with a swimming pool. However, if you want to buy an investment property, you should consider the amenities that would be most attractive to future tenants or buyers.

Since buying real estate is a significant investment, you shouldn’t rush it. Take your time to do some thorough research before making an offer. Hiring a real estate agent is your best option if you're interested in a second home. A professional with experience and many contacts will help you find the perfect vacation home. If you’re interested in an investment property, you should seek advice from experienced investors.

You should never dive headfirst into the real estate market. Doing some research beforehand can help you make the right decision and avoid major mistakes. And be advised that in this field, major mistakes entail losing a lot of money. And nobody wants that. Knowing the difference between a second home and an investment property is very important. This helps you prepare for what is to come regarding financing, down payment, and taxation. So, you should carefully assess the pros and cons of both options before buying.

Article Written by Guest Blogger:

Dakota Hendrix Editor @ US Pro Warehouse
w: usprowarehouse.com
e: [email protected]