The Differences Between Buying A Second Home vs. Investment Property

The Differences Between Buying A Second Home vs. Investment Property

  • 10/5/23

Are you considering jumping into the real estate market? Rental property owners earn roughly 45% more than the median household income. The world of real estate provides numerous opportunities, especially when it comes to acquiring a second home or an investment property. However, these two types of properties are distinct in several ways. Let's delve into the differences between a second home and an investment property, focusing on the benefits, drawbacks, and essential aspects of each.

Quick insights about investment properties

Let's go over some noteworthy information about investment properties, backed by reliable sources:

  • The U.S. boasts approximately 48.2 million rental units spread across almost 20 million properties, as reported by Bankrate through Census data.

  • Individual investors own the lion's share of rental properties (70%), while profit-driven corporations own around 18% of properties, accounting for 45% of all rental units.

  • In 2022, residential real estate investors are grappling with considerable challenges, primarily due to a shortage of supply and escalating prices.

  • Around 34% of U.S. households reside in rental housing, with a good mix of single-family homes (42%) and apartments (36%). Interestingly, almost half of all renters are under the age of 30.

  • As of June 2022, the average monthly rent soared past $2,000. San Jose, California, took the crown as the priciest rental market, with a monthly rent of $3,361, while Youngstown, Ohio, was the most affordable at $960.

  • However, there's a downside: 16% of renters found themselves behind on rent payments as of May 2022.

Interesting facts about second homes

Now, let's look at some compelling data about second homes:

  • Gitnux reported that the U.S. was home to around 1.5 million second homes in 2018, signifying that many are investing in second homes for a plethora of reasons.

  • There was a 30% surge in second home sales in the U.S. in 2020, indicating an increasing desire for the liberty and flexibility provided by owning a second home.

  • Did you realize that 24% of U.S. second-home buyers in 2020 intended to rent out their property short-term? It's an ingenious strategy for some extra revenue.

  • An emerging trend in second home ownership is the co-ownership of second homes, with roughly 5% of second homes in the U.S. shared ownership among several families.

Understanding the concept of a second home

A second home, as the name suggests, is an additional residential property that owners purchase apart from their primary residence. Typically, these homes are located in resort or vacation areas. The owner might use this second home for personal vacations or as a part-time residence during the year. Second homes can also serve as convenient residences for older children attending university, elderly parents, or as a future retirement home.

Decoding the term “investment property”

An investment property is essentially real estate property purchased with the primary intent of earning a return on the investment. This return could be through rental income, the future resale of the property, or both. Properties eligible to be considered as investment property range from residential structures like single-family homes and apartments to commercial properties.

The disparity in mortgages for second homes and investment properties

It's crucial to understand how mortgages differ when considering a second home vs an investment property. Various factors, such as mortgage rates, down payments, and qualifying requirements, come into play.

Interest rates for mortgages

In most cases, investment property mortgage rates are typically higher than those for second-home mortgages. This is because lending institutions perceive investment properties as riskier, given that property owners might prioritize their personal residence mortgage payments over investment property mortgages.

Required down payments

As for down payments, investment property loans often necessitate a larger down payment than second home loans. The larger down payment requirement helps to offset the higher risk associated with investment properties.

Necessary qualifications

The qualifying requirements for an investment property loan are usually more stringent compared to a second home loan. Lenders often require higher credit scores and a lower debt-to-income ratio for investment properties. Furthermore, lenders might consider projected rental income from the property to help qualify buyers for investment property loans.

Income from rent

Rental income can be a significant advantage of owning an investment property. This additional income can help offset the costs of the property, such as mortgage payments and property taxes, and might even provide additional income.

The ethics of declaring your investment property as a second home

Converting your second home to an investment property

An important question is whether it's ethical or even legal to claim an investment property as a second home. It's not uncommon for homeowners to start using a second home as an investment property after closing, generating income through rentals. However, homeowners must be mindful of potential tax implications and should always consult a tax professional for advice.

Misrepresenting an investment property as a second home can lead to serious consequences, including charges of mortgage fraud. This is because mortgage lenders offer different mortgage rates and require different down payments for second homes and investment properties, reflecting the different levels of risk associated with each type of property. Hence, honesty in representing the property's intended use is not just ethical but also legally required.

About Margot Reutter

A prominent name in the real estate industry, Margot Reutter is renowned for her work in the affluent Hamptons area, handling properties worth millions of dollars. If you're contemplating diving into the real estate market, be it buying or selling a home, or if you simply have questions about the New York real estate market, don't hesitate to contact Margot Reutter today.

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