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.
An investment property is a property you buy to generate income, like to rent to tenants or flip and sell for a profit. However, a second home is a single-family dwelling that you plan to live in for some of the year or visit regularly.
The definition of an "investment property" is a property that's:
Basically, if you buy real estate that you'll use just to make a profit, rather than as a personal residence for you and your family to enjoy, that property is considered an investment property.
Investment property loans usually have higher interest rates and require a larger down payment than properties people use as second homes.
Examples of investment properties include:
A "second home" is a residence you intend to occupy for part of the year in addition to a primary residence. Usually, a second home is used as a vacation home. But it could also be a property that you regularly visit, such as a condo in a city where you often 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 (typically at least 50 miles) from the borrower's primary residence.
Second-home loans regularly have a lower interest rate than investment-property loans and might include a Second Home Rider along with the mortgage. This rider often says that:
Fannie Mae and Freddie Mac rewrote their guidelines to make it clear that if you have a Fannie Mae or Freddie Mac mortgage on a second home, that house can be used as a rental property, subject to some limitations.
Here are the rules:
Renting a second home was always allowed under Fannie Mae and Freddie Mac policies under certain circumstances.. But because of the complex language in the rider, both borrowers and lenders often didn't understand the rules.
Also, you can't use a property management company to help you manage the rental. So, you must handle all rental tasks, such as finding renters, collecting payment, and maintaining the property. You can hire someone to do particular tasks, like yard work, but you must manage the rental yourself. You also can't enter into a timeshare agreement.
Investment properties and second homes have different tax benefits. For example, expenses usually aren't deductible for personal residences, like second homes. Associated costs with these properties are nondeductible personal expenses. But if you have an investment property, say a rental, you can write off expenses, like maintenance costs.
For tax purposes, if you rent out your property, including a second home, for 14 days or fewer each year, the income isn't usually taxable at the federal level. But if you rent out your property for more than 14 days per year, you'll have to pay federal income tax on your net rental income. (However, the terms of your mortgage contract might prohibit renting out a second home.)
Mortgage interest is deductible for a second home in some cases. For an investment property, it can be deducted as a business expense to lower taxable income.
A second-home loan might be appropriate if you want to use the property yourself but perhaps rent it out sometimes or keep it for your exclusive use. An investment property loan is probably appropriate if you want to rent the property out full time.
If you're considering taking out a loan to purchase either an investment property or a second home, be sure you understand the differences between these terms and make your intentions clear to the lender when you start applying for the loan. That way, you'll ensure that you get the correct type of loan for the kind of property you intend to buy.
To learn more about purchasing an investment property or second home, see Nolo's articles:
Talk to a real estate lawyer to get more information about buying an investment property or a second home and how to finance such a purchase. If you have questions about the taxation of these properties, talk to a tax lawyer.