Right now, the real estate market is booming. Therefore, there are many people looking to invest in properties. Terms like “second home”, “investment property”, “vacation home, ” etc, are constantly being used. However, is there really a difference between all of these? The answer is yes. When comparing investment properties vs. second homes, it is important to consider that there are some big differences- especially when it comes to financing. Although both build wealth over time, both come with risks and expenses that should be considered. In this article, we will break down everything you need to know about investment properties vs. second homes.
What is a second home?
A second home is a property where you and your family spend time. However, as the name suggests, this is not your main home. Many times, a second home is also referred to as a vacation property. When you have a second home, you might take advantage of platforms like Airbnb to rent it out, but overall, it is a property that you primarily use yourself.
Buying a second home might be a good idea if you visit a certain spot regularly. For example, if you have family you visit in a regular basis in another place, or if there’s one particular vacation spot you visit constantly. In these instances, owning a home might be a smarter decision than spending money on short term rentals or hotels every time you visit.
What is an investment property?
An investment property, on the other hand, is one you purchase with the goal of generating income. You can purchase investment homes in pretty much any place that interests you. The difference between this and a second home, is that you will not be spending much time in this property. The point of an investment property is to rent it out in order to generate income. You’ll be playing the role of landlord, with long-term or short-term renters paying you to stay in that property. Before making an offer in an investment property, you will want to do your research to make sure it’s a good investment.
Why it is important not to confuse the two:
When going through the home buying process, it is important not to use these terms interchangeably. Especially when it comes to your loan application. If you lie on your loan application, you could be committing mortgage fraud, which is a federal offense.
All you need to know about financing an investment property or second home:
If you are paying cash, you might not need to worry about these factors. However, if you need a mortgage, you should know that financing a second home or investment property is very different from financing a primary residence. In addition, although financing investment properties vs. a second homes have some similarities, there are also some key differences that you need to know.
- Interest rates: When going through the process, you might notice that interest rates for these properties are higher than for a primary home. This is normal. A lot of times, lenders see more risk in these transactions.
- Taxes: Tax rules are different for these types of properties. For a second home, you’ll generally treat it just as you would your first home when it comes to taxes. However, if you own an investment property, there are a few differences when it comes to filing. For example, you have to report your rental income. If you own or are planning to own a second home or investment property, it is always better to ask a tax professional for tips and help when filing.
- Location: When applying for a mortgage for a second home, it might be required for it to be a specific distance away from your primary home. However, investment properties usually don’t have proximity requirements to your primary residence.
- Rental Income: When applying for a mortgage for an investment property, your lender might allow you to show that anticipated rental income. However, this could come with extra costs such as a specialized appraisal that takes into account comparable rents in your area.
Looking for an investment property or a second home in South Florida?
Contact us now via WhatsApp: +1 (305) 318 6968 (Heloisa Arazi) or visit https://www.amgintrealty.com to learn about all the opportunities in the South Florida real estate market.