Written by 
Edited by 
Edited by 
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?
A second home is a property you purchase primarily for personal use rather than for generating rental income. Many people buy second homes as vacation getaways, seasonal residences or places to stay when visiting family. Because the property is meant for your enjoyment, you generally occupy it for part of the year, and any rental activity, if allowed at all, is limited to a small number of days without changing its classification in the eyes of the IRS.
Lenders and tax authorities treat second homes differently from investment properties. For example, mortgage rates on second homes are often slightly higher than those on primary residences, but still typically lower than the rates applied to investment properties because lenders view them as lower risk.
From a tax perspective, you can deduct mortgage interest and property taxes on a second home, similar to your primary residence, as long as you follow IRS rules. Understanding how a second home is defined helps you make informed decisions about financing, taxes and long-term ownership costs.
What Is an Investment Property?
An investment property is real estate you purchase with the primary goal of generating income, appreciation or both. Unlike a second home, which is meant for personal use, an investment property is treated as a business asset. You might rent it out long-term, offer it as a short-term rental or hold it specifically for potential value growth. Because your intent is profit, the IRS applies different rules for taxation, deductions and record keeping.
Financing an investment property also differs from buying a second home. Lenders typically charge higher interest rates, require larger down payments and impose stricter qualification standards because investment properties are considered higher risk.
The upside is that rental income and a wide range of expenses (such as maintenance, insurance, property management fees and depreciation) may be tax deductible, helping offset the cost of ownership. Knowing how investment properties are defined and treated can help you evaluate whether the potential returns align with your financial goals and risk tolerance.
Financing Second Homes and Investment Properties
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 Purpose | Covers homes used occasionally for personal use (e.g., vacation homes). | Covers properties rented out to tenants. |
| Property Usage | Personal-use, non-primary residence. | Income-generating property leased to tenants. |
| Coverage Provided | Protects against damage (fire, storms, vandalism, etc.) and personal liability. | Includes property damage, liability, and loss of rental income coverage. |
| Liability Coverage | Protects 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 Eligibility | Personal use, non-primary residence. | No tenants or short-term rental agreements are allowed (personal use only). |
| Cost | Typically 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 for | No 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
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 vetted financial advisors who serve your area, and you can have a free introductory call 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.
Photo credit: ©iStock.com/PeopleImages, ©iStock.com/syahrir maulana, ©iStock.com/FG Trade