What’s the Difference Between a Second Home and an Investment Property?
An investment property is a home you’ve purchased to generate income, with no intent to live in it. You may plan to rent it out, to eventually sell it for a profit, or both.
Mortgage Rates
Mortgages for both second homes and investment properties often come with higher rates than you’d get on a mortgage for a primary residence—though your rate will vary based on factors like your credit, debt-to-income ratio, type of mortgage, and term. However, you’ll typically receive a higher rate for an investment property mortgage than a second home mortgage because many lenders view investment property mortgages as riskier than those for second homes. Since you won’t use the property yourself, they may believe it would be easier for you to walk away from it and default on your mortgage.
Down Payment Requirements
Since many lenders view investment properties as riskier than second homes, they’ll often want you to put down more money from the start. You can expect to pay 15% to 25% of the sale price as a down payment for an investment property, potentially depending on its size. However, for a second home, you may be able to put down as little as 10%, depending on your lender.
Other Qualifying Requirements
To qualify for a mortgage on a second home while you’re still paying down your first home loan, you’ll need to be able to prove that you can handle the payments for both mortgages. But when you’re buying an investment property, your lender may consider up to 75% of your anticipated rental income as part of your qualifying income. This allows you to lower your debt-to-income (DTI) ratio and may make it easier to qualify for an investment property mortgage. Since your second home is generally considered a vacation home or a getaway, your lender may impose geographical restrictions, such as that it must be located a certain distance away from your primary residence. Investment properties face no such restrictions. Your lender may also limit the type of property they’ll allow you to buy as a second home. For example, Fannie Mae requires that your second home is:
A single unitUnder your exclusive controlOccupied by you at least once a yearSuitable for year-round occupancyNot a timeshare.
Tax Treatment
Taxes can get complicated for both second homes and investment properties, especially if you rent them out. To understand your tax obligation for your second home, you’ll need to calculate how much time was personal use versus rental use. If you use the property for more than 14 days or more than 10% of the number of days you rent it out, you won’t be able to deduct all your rental expenses. However, you may still be able to itemize deductions such as the personal portion of mortgage interest and property taxes on Schedule A. In most cases, you must report all income from an investment property on your tax return. However, you’ll be able to deduct rental expenses such as repairs, utilities, depreciation, cleaning, and mortgage interest.
Should You Buy a Second Home or an Investment Property?
If you’re looking for a place to visit on the weekends or seasonally and you have enough income to cover another mortgage, buying a second home may be right for you. You could even opt to rent it out when you’re not staying there, though you’ll want to be sure not to violate the terms of your mortgage agreement or home insurance. A second home could also be a good option if your workplace is quite far from your home and you need a place to stay during the workweek. However, if you’re looking for a way to make money by renting or flipping real estate, you may want to consider an investment property.
The Bottom Line
Second homes and investment properties have major differences in terms of what expenses you can deduct, whether they can be rented out, and even the down payment and mortgage qualifications. Before you call a lender or real estate agent, make sure you consider which option is the best fit for your needs.
