There are a lot of ways to get started in the real estate market, from purchasing and renting townhomes to "flipping" a house to make a profit. However, purchasing an investment property is one of the most popular ways to kickstart a real estate career or profit from a short-term venture. Investment properties differ significantly from second homes, although they often get confused in broader discussions. If you're considering purchasing either one, these tips will assist in explaining the difference between a second home vs. an investment property and breaking down the unique benefits of each.
What is a second home?
A second home is a property that you intend to occupy for part of the year. Often, a second home is a vacation home or other residence in an area where you go to unwind or get away from it all. Second homes are one-unit properties, and, generally speaking, lenders will require proof that you intend to live in the home rather than renting it out to tenants.
According to Forbes, the IRS defines a second home as a property you live in for more than 14 days per year or 10% of the total days you rent it to others. While some property owners might choose to rent out their second homes on travel sites like VRBO or Airbnb or to share it with friends and family, the primary reason for getting a second home is to enjoy it yourself. Many people who purchase second homes buy them in areas where they vacationed in previous years or in a beautiful, tropical location where they always imagined living.
What is an investment property?
While second homes aren't usually purchased with the intention of generating income, investment properties are all about making money and growing your real estate portfolio. Investment properties can be located anywhere you sense potential, whether down the street from your home or in a different state.
Investment properties can either be purchased for use as a rental, to generate long-term income over time, or to be renovated and sold as a "flip." Investment properties can be multi-unit or single-unit. Multi-unit properties allow you to get income from multiple tenants if you use the property as a long-term rental. Before making the decision to invest in an investment property, sit down with a real estate advisor and your financial planner to discuss whether this move makes sense for you. Investing in real estate is costly, so you'll want to be sure it will be worth it.
What to know about financing for second homes and investment properties
In general, financing a second home is much easier than financing an investment property. Still, lending requirements for both types of properties tend to be stricter than financing for a primary residence. Many lenders may see these properties as riskier investments since a property owner is more likely to prioritize their primary residence over investments or vacation homes. Here are some other financial tips to keep in mind for second homes and investment properties:
Down payment. While this depends wildly on your specific lender, you can generally expect to put up a larger down payment than for a primary residence. Terms will vary, but it's a good idea to plan for at least a 15% or 20% down payment.
Interest rate. As with a down payment, it’s typical to see higher interest rates with second homes and investment properties. Most lenders view these transactions as riskier than traditional mortgages, so they want to protect themselves by building an additional "cushion" into your financing.
Credit score requirements. Again, this differs based on the terms set forth by your lender. However, credit score requirements are typically higher than for a standard mortgage, with many lenders asking for a minimum of 700 for a second home purchase and 720 for an investment property. A caveat to this is that you often have to make a sizeable down payment in addition to maintaining the credit score requirements.
Location. Not all lenders require this, but some financial institutions require your second home to be at least 50 miles from your primary residence. The same requirements don't typically apply to investment properties.
Before investing in a rental property or buying a second home, thoroughly review the terms of any financing you choose to utilize. You don't want to be surprised by any hidden terms or realize at the last minute that you don't fit the exact specifications set forth by your financial institution. With some planning and forethought, you'll be able to purchase the property that you're interested in.
Benefits of working with a realtor for your real estate ventures
It's a good idea to work with a real estate agent experienced at working with both investment properties and second homes to protect yourself and your investment. There are many benefits to working with a realtor rather than starting your journey solo. Working with a realtor gives you access to more listings, so you'll better understand what's on the market. You are also more likely to reach a deal quicker when you work with a real estate agent. Your realtor can not only help you identify the competitive advantages of a particular property, but they can negotiate, purchase, and, if applicable, sell that property much faster than you can by yourself.
Most importantly, a realtor can give you valuable market knowledge of trends and property sale prices that you'll need to be aware of. This deep area knowledge can assist you in identifying and securing property deals that make the most sense for your goals. Once you establish this valuable partnership with a local realtor, you can repeatedly turn to their expert services as you pursue your property ownership goals.
Contact John D'Amico for assistance with second homes or investment properties
If you're considering a second home vs. investment property, think about your own long-term goals. Both types of property investments can be profitable and worthwhile, bringing you happiness for years to come. If you have questions about real estate investments or want to purchase a vacation home, John D'amico can help. A knowledgeable realtor with deep insights into the investment property and vacation home markets, John can help you achieve your unique goals. Contact John D'Amico today to get started on your real estate journey!
*Header photo courtesy of John Damico