The Differences Between Buying a Second Home vs Investment Property

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A second home and an investment property serve very different purposes and come with their own perks in terms of enjoyment and profit. When buying both property types, it’s always best to look in desirable areas like Rancho Mirage. The city’s comfortable climate, great country clubs, and resort hotels provide a range of luxury amenities that can be enjoyed throughout the year. Buyers searching for houses for sale in Rancho Mirage should keep these differences in mind when deciding between a second home and investment property.

Defining property types

Put in simple terms, a second home is designed for personal use, while an investment property is purchased to generate income via renting or reselling. Here’s a deeper look into what makes these property types unique.

What is a second home?

A second home is a property that buyers live in for part of the year, whether that be to vacation in an area or to work away from their primary home. For a residence to remain a second home, the IRS requires owners to visit it for at least 14 days of the year. Second homeowners can also rent out their properties for a limited time without having to record the income. However, rental times can’t exceed 15 days out of the year or more than 10% of the days the owner lives in the property.

What is an investment property?

An investment property is real estate a buyer purchases with the goal of making a profit. These properties can be more than one unit and span across many property types. Common investment property types include long-term rentals, short-term vacation rentals, and house-flipping properties. Depending on a property’s zoning, investors can also rent it out for commercial purposes.

Investment properties can be rented out all throughout the year. Since the restrictions of renting out a second home are so strict, a property may be considered an investment property even if it isn’t rented out the majority of the year.

Differences in financing

Buyers searching for homes for sale in Rancho Mirage should be aware of financing differences when it comes to owning second homes versus investment properties. Both are seen as higher-risk investments and require stricter qualifications than primary home mortgages.

Financing a second home

Buyers who choose to finance a second home with a mortgage need to clearly define their property’s occupancy when securing the best rate. Occupancy status ranges from primary, second home, and investment. Being clear on second home occupancy will help buyers avoid the higher rates and stringent regulations of investment properties. Even so, buyers should expect interest rates to increase between 0.5% to 0.875% when financing a second home.

Since these properties are higher risk, many lenders require larger down payments. Typically, most second homeowners pay 10% down. Lenders also require a much higher minimum credit score for a second home purchase. Buyers can expect higher credit score requirements if they opt for a lower down payment. Buyers must also set aside funds equaling two house payments.

Financing an investment property

Investment properties are even tricker to finance since owners are more likely to default on them in comparison to primary homes. Candidates applying for a loan should have a credit score above 700 and prepare for a minimum down payment of anywhere between 15-25%. Mortgage interest rates are also higher than loans for primary residences. Some lenders require investors to save cash reserves for up to six months of payments.

The main difference between financing investment properties and second homes is that a buyer may be able to use the projected rental income to qualify for a mortgage. Sourcing projected rental income up to 75% can help investors qualify for the mortgage they need. To do this, some lenders require an appraisal of the property or past proof of rental management success.

In certain circumstances, investors purchasing a property may qualify for government-backed loans. Homeowners purchasing a multi-family home can qualify for an FHA loan for as little as 3.5% down as long as they live in a unit of the property for a year. Buyers who are eligible military borrowers can purchase a multi-unit property of up to 7 units with a VA loan as long as they live in a unit. VA loans come with no down payment costs, which is a considerable advantage.

Tax Benefits

Both second homes and investment properties come with a few tax benefits that can help offset initial costs. Keep these deductions in mind when buying homes for sale in Rancho Mirage. For more specific input regarding deductions and benefits, reach out to an experienced real estate agent, like those with OMNI Real Estate Group.

Ready to buy in Rancho Mirage?

There are many great second home and investment property options for buyers interested in homes for sale in Rancho Mirage. Second homes are best for personal use like work or leisure, while investment properties are designed for making a profit. If you’re ready to start a home search in the area, contact one of the local agents at OMNI Real Estate Group for expert guidance.

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