Second Home vs. Investment Property: What’s the Difference?.
If you’re thinking of buying a second home or an investment property, it’s important to understand the differences between these two real estate terms.
You hear these terms thrown around all the time: Second home, investment property, vacation home, rental property. But is there any real difference among them? And does it even matter what you call it?
As it turns out, there are some very big differences between second homes and investment properties, especially if you are financing it.
“Both are fantastic ways to build wealth over time by capturing the appreciation of a real asset,” says Tony Julianelle, CEO of Atlas Real Estate in Denver. However, “both come with inherent risks and expenses that should be carefully considered when making a purchase.”
As with any real estate transaction, you’ll want to do your homework and make a smart choice for your wallet, no matter which path you go down. We chatted with experts to get the scoop.
A second home is just that: a second property where you and your family spend time, away from your primary home. You might also hear a second home referred to as a vacation property. You may rent it out for a few days each year on Airbnb or VRBO, but you primarily use it yourself.
Buying a second home makes financial sense if there’s one particular vacation spot you visit regularly. Why spend a fortune on hotels or Airbnb when you can own your own piece of paradise that will hopefully appreciate in value over time?
“Let’s say you live in San Francisco, but you are an avid skier in the winter and like to hike in the summer,” says Rachel Olsen, a real estate agent in California. “If you spend many weekends and vacations in Lake Tahoe, it may make sense to purchase a second home there.”
An investment property, on the other hand, is one that you purchase with the explicit intention of generating income. The investment property could be right next door to your own home, or it could be in another state—it doesn’t really matter. You’ll be playing the role of landlord, with long-term or short-term renters paying cash to stay in the home.
“Never forget that an investment property is all about the Benjamins,” says Lamar Brabham, CEO and founder of financial services firm Noel Taylor Agency. “The entire point is to turn a profit. No emotions, no affection.”
Before making an offer on an investment property, you’ll want to crunch the numbers to make sure it’s a solid investment. Similarly, consider what factors will be important to prospective tenants (e.g., access to public transportation, good schools, parking, and low crime rates).
If you’re paying cash, you can skip this section. But if you need a mortgage for your new property, you should know that financing a second home or investment property is very different from financing a primary residence. And, while mortgages on second homes and investment properties have some similarities, there are also some key differences.
It’s important that you’re totally clear about the difference and not use the terms “second home” and “investment property” interchangeably. Some people try to pass off their investment property as a second home to get more favorable financing, but you should never do this.
If you lie on your loan application, you could be committing mortgage fraud, which is a federal offense.
Your lender’s underwriting team is aware of this possibility, so don’t try to pull the wool over their eyes. They’ll take the big picture into account when deciding what loan terms to offer you, says real estate attorney David Reischer.
“A single-family residence by a lake that is located in a completely different state from the borrower’s primary residence is much more acceptable to be categorized as a second home by a bank underwriter,” he says. “A multifamily-unit property with rental income in an urban area is likely to be treated as an investment property.”
Bottom line: Keep everything aboveboard, and you won’t have to worry about a thing.
The post Second Home vs. Investment Property: What’s the Difference? appeared first on Real Estate News & Insights | realtor.com®.
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