Are you looking to grow your real estate portfolio? You'll be joining the millions of other Americans who have already made the leap. As of 2020, there was an estimated 7.15 million second homes.
The term "second home" is often used to refer to any property that's not a primary residence. But there actually is a difference between second homes and investment properties.
A second home is a secondary residence occupied by the owner, usually a vacation house. An investment property is bought with the intention of renting it out and drawing income. But the differences go deeper than that.
Keep reading to learn more about the differences between a second home vs an investment property.
Down Payment
Many lenders require a 20% down payment for a second home. However, in some cases, you might be able to put down only 10%.
For an investment property, you will need to put down at least 20%, but some lenders may require up to 25%. This is because the mortgage on an investment property is a bigger risk for the lender.
Interest Rates
Interest rates for second homes are typically in the same range as those for primary residences. For investment properties, you can expect interest rates to be about one to three percentage points higher. This is also because loans for investment properties pose a higher risk.
Debt-To-Income Ratio
Debt-to-income (DTI) ratio is an important part of determining your eligibility for a mortgage. Whether you're buying a second home or an investment property, your new mortgage payment will be factored in.
For investment property, you can alter your ratio by factoring in your expected income. Lenders typically allow up to 75% of the total to count towards your DTI.
Tax Deductions
Any income made from an investment property has to be included in your taxable income. If you rent out your second home, you don't have to declare this income if the property was rented for less than 14 days in a given year.
With an investment property, there are many tax deductions you can take advantage of. You can deduct insurance, maintenance, and utilities, along with any depreciation of the property. This can have a huge impact on your overall tax burden.
If you own a second home, there are also several deductions you can make. You can deduct property taxes, mortgage interest up to $750,000, and mortgage insurance.
Distance From Primary Residence
A property has to be 50 miles or more from your primary residence to qualify as a second home. There may be some exceptions under certain circumstances, but this is the general rule.
An investment property doesn't have any requirements regarding the location.
Buying a Second Home vs an Investment Property
Knowing the difference between a second home vs an investment property is an important first step when purchasing a secondary residence. Think about your goals and how you want to use the property before making a decision.
If you do decide to go with an investment property in the Nashville area, you'll need help managing it. We offer a range of services, from maintenance to tenant screening to rental property accounting.
Contact us today to let us know how we can help.
