What is the Difference Between Investment Property and Second Home?

Whether a residence is classified as a second home or an investment property, matters when it comes to mortgage loans.

People sometimes use the terms "investment property" and "second home" interchangeably to describe real property that is not their primary residence, but there are some very distinct differences between these types of properties.

What real question is, are you planning on long or short term renting the property for income or not?

What is an Investment Property?

An investment property is a property that is not your primary residence, and is purchased or used in order to generate income, profit from appreciation, or to take advantage of certain tax benefits. Basically, if you purchase real estate that will be used to make a profit, rather than used as a personal residence for you and your family, that property is considered to be investment property.  This includes immediate rental usage, whether it is long term tenants or short term Airbnb style guests.

There are many different types of investment property including:

• checkResidential rental property
• checkCommercial property
• checkProperty purchased to “flip” (where the buyer purchases property with the goal of reselling it for a profit 

Investment property loans usually have higher interest rates and require a larger down payment than properties occupied by their owners as second homes.

What is a Second Home?

A second home is a residence that you intend to occupy in addition to your primary residence for part of the year. Typically, a second home is used as a vacation home, though it could also be a property that you visit on a regular basis, such as a condo in a city where you frequently conduct business.

Often, to qualify for a second-home loan, the property must be a certain distance from the borrower’s primary residence or it is located in a known tourist destination, such as Sonoma County or the wine region in general.

Second-home loans regularly have a lower interest rate than investment property loans and will usually include a Second Home Rider along with the Deed of Trust. This rider usually states that:

• checkThe borrower will occupy and only use the property as the borrower’s second home
• checkThat the property will be kept available for the borrower's exclusive use and enjoyment at all times (NO RENTAL INCOME ALLOWED)
• checkThe property cannot be subject to any time-sharing arrangement or rental pool, and
• checkThe property cannot be subject to any agreements that require the borrower to rent the property or give a management firm (or any other person) control over the occupancy and use of the property.

MOST IMPORTANTLY!!! If you plan on refinancing out of second home financing at anytime and a lender sees that you have been using this property as a rental to derive income, they could technically claim you have committed mortgage occupancy fraud and call your loan due immediately.

If you’re considering taking out a loan to purchase either an investment property or second home, make sure you understand the differences between these terms and make your intentions clear to the lender when you start the start the process of applying for the mortgage. This will ensure that you obtain the correct type of loan for the type of property you intend to purchase.