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SmartAsset: Second Home vs. Investment Property

Buying a second home can be significantly easier and less costly to finance than buying an investment property. Investment properties can offer you tax deductions by claiming operating expenses and ownership. Second homes, on the other hand, can also generate rental income and tax deductions for expenses, as long as the owner lives there for at least 14 days a year or 10% of the total days rented. Let’s break down the differences.

A financial advisor could help you put a financial plan together for buying a second home or an investment property.

Second Home and Investment Property Basics

In addition to a primary residence, homeowners may have a second or vacation home, as well as investment properties that are rented to third parties for income. The primary residence is where the owner lives most of the year.

Second homes are properties such as vacation homes that the owner personally occupies for more than 14 days per year, while still also maintaining a primary residence. It’s possible to have more than one second home.

It’s also possible to generate income by renting a second home to third parties for part of the year. The property will meet the definition of a second home, rather than an investment property, as long as the owner lives there for a number of days equal to at least 10% of the days the home is rented or 15 days a year.

Investment properties don’t have any occupancy requirement. They can be rented out 365 days a year to third parties. Rentals may be long-term, such as on an annual lease basis or short-term. Owner make money on investment properties from rental income and appreciation and gain tax deductions they can use to shelter income.

Financing Second Homes and Investment Properties

SmartAsset: Second Home vs. Investment Property

When applying for a mortgage, a borrower has to indicate whether the property will be used as a primary residence, second home or investment property. Primary residences are the easiest and least expensive to finance, with looser qualification standards and lower interest rates. Down payments on primary residences may be as low as 3% of purchase price on conventional loans, 3.5% on FHA loans and zero on VA loans.

Lending requirements on second homes are stricter. Lenders are likely to look for a lower debt-to-income ratio to be sure the buyer can cover the second mortgage payment, for instance. Second-home mortgages may require 10% down. Interest rates are also likely to be slightly higher than primary home mortgages. Except for a few special circumstances, FHA loans can’t be used to purchase second homes.

Investment property is the hardest to finance. Lenders call for down payments of 25% or so and also prefer higher credit scores. Government-backed lending programs generally can’t be used to buy investment property. Financing an investment home is likely to involve paying more interest and additional fees to the lender. However, borrowers can often use the projected rental income to help them qualify for an investment mortgage.

Taxes on Second Homes and Investment Property

Like primary residences, second homes with a mortgage can provide the owner with a tax deduction for the interest on the loan. Owners of second homes who rent them out part of the time may be able to reduce the amount of taxable rental income by deducting expenses for owning the home. To qualify for these deductions, the property must be rented at fair market value for more than 14 days or at least 10% of the total days rented per year.

Investment homes also offer a host of tax deduction opportunities. Owners can claim expenditures for mortgage interest, property taxes, insurance, maintenance, utilities and losses due to damage. They can also deduct a percentage of the property’s value each year due to depreciation.

Bottom Line

SmartAsset: Second Home vs. Investment Property

Second homes and investment homes are looked at differently by lenders and taxing authorities. Second homes are harder and more costly to finance than primary residences. Loans for investment homes generally involve more costs and are harder to qualify for. Second homes can offer some tax breaks, as well as the opportunity to generate part-time rental income. Expenses related to owning an investment home can help shelter rental income from taxes.

Tools for Buying Real Estate

  • Whether you’re buying a second home or an investment property, a financial advisor could help you create a financial plan for your needs. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you don’t know how much money you’ll need to buy a home, SmartAsset’s free calculator could help you figure out how much home you could afford.
  • SmartAsset’s mortgage calculator let’s you estimate your monthly mortgage payment with taxes, fees and insurance.
  • Use our mortgage comparison tool to compare mortgage rates from top lenders and find the one that best suits your needs.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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