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 is not their primary residence, but there are some very distinct differences between these types of properties. Read on to find out more.

What's 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.

There are many different types of investment property including:

• residential rental property
• commercial property, and
• property 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's a Second Home?

A second home is a residence that you intend to occupy in addition to a 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 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 will 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 cannot be subject to any timesharing arrangement or rental pool, and
• the 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.

Second-Home Loan or Investment-Property Loan?

Many lenders will not offer a second-home loan if the borrower intends to rent the property out for any period of time. For example, you may qualify for a second-home loan if you plan to live there during the summer, but do not 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, 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.