If you thought a primary residence was your only option of homeownership – think again.
There is your primary residence, vacation homes, rental properties, second homes, investment properties, but what is the real difference between these?
They are all great ways to build wealth by owning a real asset that appreciates over time.
However, a second home and investment property do not exactly work in the same way. Here is how they are different:
Second-home
A second home is where you and your family spend time away from your primary residence. This can be a summer home, a vacation home, or whatever else you wish to call it.
You can also rent out this type of home when it is not in use on vacation rental sites.
Many of those who live in colder climates will buy a second home in a warmer state to escape for the winter months.
Investment property
When you purchase an investment property, your intentions are not to be living in it. An investment property is usually purchased to generate a second source of income.
You will become a landlord or hire a professional Property Management service, and renters will then inhabit the home as tenants and give you a monthly payment.
The goal for an investment property is that the payment your tenants will give you will be more than your monthly mortgage. To be sure this is a solid investment, you will have to price this payment just right and consider what other bills, utilities, and maintenance you will be responsible for.
Financing options
If you plan on paying cash, then you do not need to worry about the following. However, it is most likely you are planning on taking out a mortgage for your second home or investment property. Here is where things can get tricky:
- Interest rates: Taking out a second mortgage could come at a higher interest rate because lenders see this type of transaction as riskier. Homeowners are more likely to default on their second mortgage versus their first one if they become financially strapped.
- Qualifying: Beware that you may have to jump through a few extra hoops to qualify for a second mortgage. Your lender just wants to be sure you have the extra cash reserves on hand to afford two mortgages at once.
- Down payment: Depending on your lender, they may also require a larger down payment – typically between 15% to 25%.
Some other items to keep in mind are your lender may accept the potential rental income you anticipate generating to help qualify you for your mortgage. Additionally, when it comes time for tax season, you will have to report your rental income.
Whether purchasing a second home or investment property, make sure your intentions are completely clear when filling out your application to avoid committing fraud.
