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Second Home vs. Investment Property: Key Differences

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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 between a second home vs. an investment property.

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

What Is a Second Home?

In addition to a primary residence, homeowners may have a second home. This property can be a vacation home or a residence that you can use for work. Essentially, a second home is defined as a place where you would only live for part of the year.

The IRS defines a second home as a place that you visit for at least 14 days during the tax year. A primary residence, by contrast, is where the owner lives most of the year.

It’s possible to have more than one second home. And, you can also 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.

What Is an Investment Property?

Unlike second homes, investment properties can be more than one unit. Investors commonly buy them with the intent of making money from rental income. Some investors also buy investment properties with the goal of flipping them to sell for a profit. And depending on the zoning of the property, investment properties can also be rented as commercial spaces.

Investment properties don’t have any occupancy requirements. 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. Owners make money on investment properties from rental income, appreciation and tax deductions they can use to shelter income.

Financing Second Homes and Investment Properties

Second-home mortgages may require a larger down payment than a primary home, and have higher interest rates.

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 the 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.

Second Home vs. Rental Property Insurance

Second home insurance is designed for personal-use properties, like vacation homes, that aren’t used as primary residences but are occupied by the owner from time to time. On the other hand, rental property insurance, also called landlord insurance, is intended for properties rented to tenants for short or long-term stays. Though these two types of insurance serve distinct purposes, it’s important for property owners to understand their differences to ensure they have the right coverage in place.

Second Home Insurance
Rental Property Insurance (Landlord Insurance)
Primary PurposeCovers homes used occasionally for personal use (e.g., vacation homes).Covers properties rented out to tenants.
Property UsagePersonal-use, non-primary residence.Income-generating property leased to tenants.
Coverage ProvidedProtects against damage (fire, storms, vandalism, etc.) and personal liability.Includes property damage, liability, and loss of rental income coverage.
Liability CoverageProtects the owner if someone is injured on the property during their stay.Protects the landlord from tenant or guest injury claims and damages caused by tenants.
Requirements for EligibilityPersonal use, non-primary residence.No tenants or short-term rental agreements are allowed (personal use only).
CostTypically higher than primary home insurance due to increased risk of non-occupancy.Often higher premiums are compared to standard homeowners insurance due to tenant-related risks.
Ideal forNo tenants or short-term rental agreements are allowed (personal use only).Vacation homes, lake houses, or secondary residences are occupied occasionally by the owner.

Choosing between second home insurance and rental property insurance depends on how the property is used. If the property is intended for personal use with occasional stays, second home insurance is the right fit, offering essential protection during periods of occupancy and non-occupancy. However, if the property is rented out to tenants for income generation, rental property insurance is essential to protect against tenant-related risks and potential income loss.

Bottom Line

A couple reviewing whether to buy a second home or investment property with their financial advisor.

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. Finding a financial advisor doesn’t have to be hard.  SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel 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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