The Differences Between Buying A Second Home vs Investment Property

The Differences Between Buying A Second Home vs Investment Property

Real estate offers a myriad of opportunities, from serving as a peaceful retreat to a financial investment. When considering property ownership, it's essential to understand the distinctions between buying a second home and an investment property. Did you know that rental property owners earn roughly 45% more than the median household income, according to

Fast Facts about Investment Properties

  • The U.S. boasts about 48.2 million rental accommodations scattered across nearly 20 million properties, as sourced from BankRate and Census data.

  • Single investors dominate the rental market, owning 70% of rental properties. Interestingly, although for-profit corporations only own 18% of these properties, they control 45% of all rental units.

  • In Q4 2021, an impressive 75.3% of investment properties were cash transactions, a finding from Redfin.

  • A survey reveals 34% of U.S. households opt for rental housing. Of these, 42% reside in standalone homes, and 36% choose apartments with five or more accommodations. A significant portion of renters, 47%, are millennials or younger.

  • By June 2022, the average rental charge surged past $2,000. San Jose, California, stands as the priciest rental locale in the U.S., demanding $3,361 monthly, while Youngstown, Ohio remains on the opposite spectrum at $960.

Fast Facts about Second Homes

  • In 2018, the U.S. saw an estimated 1.5 million secondary residences.

  • 2020 witnessed a 30% surge in second home sales in the U.S., showcasing the allure of the flexibility and autonomy that comes with a second home.

  • A noteworthy 24% of U.S. second home investors in 2020 eyed the prospect of short-term leasing to bolster their finances.

  • Collaborative ownership is emerging as a popular option, with approximately 5% of secondary homes in the U.S. being collectively owned by several families.

Delving into second homes

A second home, often termed a vacation home, is primarily a personal residence that owners might use part of the year, typically situated in a resort or vacation area. Unlike primary residences, these homes provide an escape, a haven away from one's regular living environment.

Unpacking investment properties

An investment property, on the other hand, is predominantly acquired for generating income. Such properties can range from single units to commercial property. The purpose is to earn rental income or benefit from its appreciation over time.

Navigating mortgage intricacies for both property types

Understanding mortgage rates

Mortgage rates serve as a reflection of how the lending market views the risk associated with a loan. For investment properties, lenders anticipate a potential for vacancies, late rent payments, or even property damage. Such eventualities can interfere with an owner's ability to make timely mortgage payments. As a result, the interest rate, which is essentially the cost of borrowing money, is set higher to mitigate these potential risks. In contrast, second homes, much like primary residences, don't carry the intent of earning income. As personal sanctuaries or vacation spots, they're less likely to undergo frequent tenant changes or bear the wear and tear seen in rental properties. This perception of reduced risk is why second home mortgage rates often mirror those of primary residences, making them more favorable to buyers.

Deciphering down payments

The down payment is a direct reflection of the lender's confidence in the borrower's ability to repay. Investment properties, with their inherently volatile nature due to market fluctuations, tenant dependability, and potential maintenance issues, are viewed with a more cautious lens. Therefore, lenders seek a larger upfront investment, or down payment, as assurance. This assures the lending institution that the investor is committed and has a significant stake in the property. On the other hand, second homes don't have such variable factors influencing them. Their primary function isn't to generate income, but to serve the owner's personal use. Consequently, lenders are more amenable to lower down payments, aligning more with the requirements of primary homes.

Clarifying qualifying requisites

The essence of a second home lies in its use as an additional personal space, not a revenue-generating asset. Lenders are keen to ensure that borrowers aren't disguising investment properties as second homes to benefit from the potentially favorable mortgage terms. Hence, they seek verifications such as the home's location, ensuring it's at a vacation-friendly distance from the primary residence, and not just a few blocks away. Furthermore, evidence that it's not being advertised for rent or has a history of earning rental income might disqualify it as a second home. Investment properties, on the other hand, come with their own set of verifications. Lenders may delve deeper into a borrower's financial health, scrutinizing credit scores, reviewing cash reserves, and evaluating debt-to-income ratios. The aim is to ensure that even without rental income, the investor can uphold their mortgage payment responsibilities.

Rental revenue considerations

Investment properties are intrinsically tied to the notion of generating income. When assessing the viability of a loan for such a property, lenders may consider the projected rental income as part of the borrower's total income. This can potentially improve the loan-to-value ratio and provide the lender with an added layer of security, knowing there's a revenue stream associated with the property. In contrast, second homes are all about personal use and leisure. The intent isn't to earn, but to relax, rejuvenate, or occasionally entertain. Consequently, any potential rental income isn't factored into the mortgage qualifications, reinforcing the property's non-commercial nature in the lender's eyes.

Ethical implications of misrepresenting your property type

Transitioning a second home post-purchase

It's essential to be transparent about the intended use of a property. Committing occupancy fraud, or falsely stating a home or an investment property as a personal residence, can have legal consequences. However, if you buy a second home and later decide to turn it into a rental, consult a tax professional and your mortgage lender to understand any implications.

About Deb Paton Showley Group

When you partner with Deb Paton Showley Group, you're greeted with unmatched service that opens a new dimension of real estate experiences. If you're on a quest to buy or sell a property, or you're curious about the Indiana real estate landscape, reach out to Deb Paton Showley Group today.

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