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The Difference Between Second Homes and Investment Properties

The decision to buy another property is a big one, and there are many things to consider before you leap. When you’re contemplating purchasing a new home in Washington DC, determining the kind of property you are looking for is an essential first step. And, despite their similarities, second homes and investment properties are not the same. Whichever one you opt for can influence your mortgage, down payment requirements, and even whether you are eligible for tax breaks.

Understanding these details will make your choice easier and help you avoid any surprises, which is precisely what our experts at Eng Garcia Properties are here to assist you with. So, let’s take a deep dive into the difference between second homes and investment properties.

What Exactly is A Second Home?

A second home is precisely that: a second home. Although it is not your primary residence, you will inhabit the place for a portion of the year, perhaps on holidays, weekends, or during seasonal periods. A second house is commonly a holiday home. However, it might also be a property you regularly visit, such as an apartment in a location where you do business.

The property must be at least 50 to 100 miles away from your main house to be called a second home in most circumstances. Lenders may also consider a second house a rental home near a primary dwelling. This is not, however, a universal rule. For instance, you can have a second property at the Chesapeake Bay – a vacation home only 40 miles from your inland family abode in Washington DC.

What is an Investment Property?

An investment property is acquired only for the aim of gaining income. This comprises a holiday rental, a fix-and-flip property, or a rental property that generates monthly revenue.

These assets are a great way to diversify or create an income stream, but they can also be more unstable. As a result, investment homes often demand larger mortgages, rising interest rates, and some lenders require a contingency fund.

You can use a conventional loan to acquire an investment property; however, an FHA or a USDA loan is not usually available. On the other hand, you can utilize an FHA home loan to purchase a multi-unit property. It’s also worth noting that buying an investment home implies having fewer credit alternatives.

Financing Methods

Mortgages for second homes and investment properties are frequently higher than mortgages for primary residences. However, your rate may vary depending on criteria such as your credit score, debt-to-income ratio, loan type, and duration.

A second house is often easier to finance than an investment property. You can find a second home mortgage with an interest rate equivalent to current prices for primary residences. Credit standards are often identical. As long as your earnings support both mortgages, obtaining a second house loan is a straightforward procedure.

Investment property mortgages are often harder to qualify for and more exorbitant. Lenders frequently have stricter credit score requirements for this type of property since they consider them a greater risk.

Applying for A Loan

When it comes to applying for investment property loans, there are certain benefits. For this, you may be able to leverage part of your projected rental income to support your qualification for an investment property mortgage. Many lenders are unconcerned with your existing obligations as long as the property is predicted to produce a sufficient income stream to meet its expenditures.

The rates for investment properties are typically 0.5 percent to 0.75 percent higher than market rates. They’re just somewhat higher for a second or vacation home than for a permanent property.

If the IRS is Concerned….

Taxes on second homes and investment properties may be tricky, especially if you plan to rent them out. To determine your tax liability, you will need to define how much time you spent in the second home for personal purposes vs. the rental use.

For a property to be considered a second home, the IRS has rules that relate to the owner-occupancy threshold. It can be deemed a second home for taxation purposes if you’re using it for two weeks each year or 10% of the days you rent it out, whichever number is higher. And it is deemed an investment property if it does not satisfy the minimum threshold.

However, it’s helpful to know that you qualify for a special exception if you rent out your second home for less than 15 days a year. If you plan to live there yourself most of the time, you can hire residential movers from DC to relocate all the household items, relax, and not worry about the taxes. If you don’t deduct any rental expenditures, you won’t have to disclose your income to the IRS.

Should You Purchase A Second Home or Investment Property?

If your goal is to generate extra income by renting or flipping, you will want to explore investment properties. In this case, getting the help of experienced real estate agents in DC is crucial. They will assist you with finding the perfect property just for your wants and needs.

On the other hand, buying a second home may be perfect for you if you’re seeking a location to visit on weekends or periodically and have enough money to afford it. You might even rent it out while you’re not using it, but you’ll want to make sure you’re not breaking the conditions of your financing or insurance policy. 

If you work in another city and you need a place to live throughout the week, a second home can be a great solution here, instead of renting a place. Helix Transfer & Storage moving professionals argue that relocating for a job can be very stressful, so it’s imperative to have all the help you can get.

The Bottom Line

Whether you have your eye on a holiday home in one of the vacation spots near DC or you are planning to add an asset to your portfolio, the difference between second homes and investment properties is significant and with many factors. Hopefully, you’ve found our article helpful and informative. Good luck!

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