Real estate is a smart investment that does not require much maintenance, and its value can easily appreciate. A second home is a property you intend to visit regularly or leave for some days in a year. Investment property represents the premises that aim to generate income through selling, leasing, or renting. These two assets have significant differences in purposes, costs, and loan qualifying conditions, which you should understand before purchasing them.
Here are the differences between an investment property and a second home.
Purpose
Second Home
One cannot plan to live in a second home for a significant period but just for vacations, holidays, or other special events. An example is a condo you can visit during winter or a cottage during summer. Although, you cannot rent a second home if you’re not using it. However, if you rent it, your taxes will be affected.
Investment Property
It is purely for generating income. You can rent an investment property and, after some time, sell it to generate income.
Mortgage Rates
These properties have high rates of mortgages compared to mortgage rates you’d get if they were your primary residence. However, these rates can vary depending on factors like mortgage term, debt-to-income ratio, and the type of mortgage.
Lenders tend to hike the mortgage rates for investment properties because they believe they are riskier than second home mortgages. It is because you don’t use the investment property; hence you can easily default on your mortgage.
Front Money Requirements
Many lenders believe an investment property is riskier than a second home. Thus, they will require you to place more deposits during the start. Usually, they have fixed this amount between 20% and 25%, depending on the cost of the premise. A down payment of as little as 10% can be accepted for a second home, counting on the lender.
Other Conditions for Qualifying for a Mortgage
You might decide to purchase a second home while having a pending loan for your primary home. Lenders will need you to prove how you can handle two loan repayments before qualifying for a new mortgage.
For an investment property, your lender will consider a significant percentage of your anticipated income as part of the deal to qualify for a mortgage. It will make it easy to qualify for an investment property loan.
Lenders may also restrict the location of your second home to be close to your primary home for them to give you the mortgage. Investment properties mortgage qualifications have no such conditions.
Tax Treatment
A second home can be treated as an investment property if you don’t use it for at least 14 days per year. If you rent your second home, it will be treated as an investment property. Meaning you will have to pay rental income tax. However, you can still enumerate repairs, depreciation, and mortgage interest as deductions.
