What Is the Difference Between an Investment Property and a Second Home?

People sometimes use the terms "investment property" and "second home" interchangeably to describe real property that isn't their primary residence, but these types of properties are different.

What Is an Investment Property?

An investment property is a property that's:

• not your primary residence, and
• is purchased or used to generate income, profit from appreciation, or take advantage of certain tax benefits.

Basically, if you purchase real estate that you'll use to make a profit, rather than as a personal residence for you and your family, that property is considered investment property.

The many different types of investment property include:

• residential rental properties
• commercial properties, and
• properties purchased to "flip" (resell for a profit).

Investment property loans usually have higher interest rates and require a larger down payment than properties that people use as second homes.

What Is a Second Home?

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

Often, to qualify for a second-home loan, the property must be located in a resort or vacation area—like the mountains or near the ocean—or a certain distance from the borrower's primary residence.

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

• the borrower will occupy and only use the property as the borrower's second home
• that the property will be kept available for the borrower's exclusive use and enjoyment at all times
• the property can't be subject to any timesharing arrangement or rental pool, and
• the property can't 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.

Second-Home Loan or Investment-Property Loan?

Many lenders won't offer a second-home loan if the borrower intends to rent the property out for any amount of time. For example, you might qualify for a second-home loan if you plan to live at the property during the summer but don't intend to rent it out at other times. On the other hand, an investment-property loan is probably appropriate if you want to reside in the home during the summer but plan to rent it out the remainder of the year.

If you're considering taking out a loan to purchase either an investment property or second home, be sure you understand the differences between these terms and make your intentions clear to the lender when you start the process of applying for the loan. That way, you'll ensure that you get the correct type of loan for the type of property you intend to purchase.