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Why Your Second Home Is Not an Investment Property
by Jane Brown on Sep 9, 2016
"You have to know where to shop” is not just good advice shared by savvy shoppers, but it’s also good advice for anyone looking to buy a home.
If this is your first home, then the home buying process is fairly well mapped out, but if you want to buy another home, perhaps for a vacation, a family member, or as an investment, then you have to understand that there is a real distinction between a second home and an investment property.
While people often use the terms “second home” and “investment property” as if they were synonymous, this is a mistake. It’s important to recognize that these two terms cannot be used interchangeably. The legalities, financing, and taxation are all different.
You can find some high-value homes at affordable prices for sale in neighboring areas. A real estate agent can help you find the best deals by researching foreclosures, short sales, and new construction, as well as check out specific subdivisions.
Let’s take a closer look at the distinction between a second home and an investment property.
What’s A Second Home?
This is a residence you intend to occupy. You might occupy it as a vacation home or because you do business in that area for a few months of the year. It might also be a place that family members occupy. In other words, besides your primary residence, this is another home you occupy, too.
When buying this home, the lender will often ask that it not be near your primary residence. To qualify as a second home, it has to be a certain distance from your primary residence. Ideally, it should be located in a vacation spot, like a mountain or ocean area, so that it can be classified as a vacation home.
Your second home loan will have a lower interest rate than if you were to rent out this home. You will get a Second Home Rider with the mortgage.
This Second Home Rider has the following stipulations:
1. You will not use this as your primary residence but as a second home.
2. You must occupy this home, rather than use it for commercial purposes. It is for your own use and enjoyment at all times.
3. You cannot rent it or use it as a timeshare property.
4. You cannot make an agreement with another person or property management company that gives them control of how the property is used.
What’s An Investment Property?
This is a residence that you don’t occupy. When you buy it, you intend to make money from it. You could make money by renting it, profiting from appreciation, or getting a tax benefit.
An investment property, then, is one that you buy to make a profit from in some way. It’s not for your personal use or for the benefit of family members.
There are many ways to define an investment property:
1. It could be a residential property for rental purposes.
2. It could be commercial property.
3. It could be a property that you buy with the intention of “flipping.” The goal of buying this property is to resell it quickly for a profit. Often you might buy a distressed property, invest in repairing it, and then resell it at a higher cost than the amount you paid for it and the cost of repairing it.
Financially, you will have to put a larger down payment down and pay a higher interest rate on your own home.
Be Clear on Your Intentions
It’s not enough to buy another home and then figure out what you will do with it. Lenders and the government want to know what you will do with the home.
Both the financing and tax structures are different. You can’t buy a second home and then turn it into an investment property. This is because you are given easier financing terms and lighter taxes if you buy a second home as opposed to an investment property.
When you buy a second home, you can’t occupy the house for your summer vacations and then rent it out for the rest of the year. However, if you buy an investment home, you can probably occupy it for your summer vacations and rent it out for the rest of the year. While the banks and the government are fine with this because you are paying your fair share of the loan and taxes, you will be losing money if you occupy your investment home.
By getting clear on your intention when buying your home, you get the right type of loans and fall within the appropriate tax brackets.