Second Home vs. Investment Property

Second home, investment property, vacation home, rental property…..Is there any real difference among them?

There are actually some very big differences between second homes and investment properties, especially if you are obtaining financing for one.

Second Home

A second home is just that: a second property where you and your family spend time, away from your primary home. You might also hear a second home referred to as a vacation property. You may rent it out for a few days each year, but you primarily use it yourself. Buying a second home makes financial sense if there’s one particular vacation spot you visit regularly. Why spend a fortune on hotels when you can own property that will hopefully appreciate in value over time?

Investment Property

An investment property, on the other hand, is one that you purchase with the explicit intention of generating income. The investment property could be right next door to your own home, or it could be in another state—it doesn’t really matter. You’ll be playing the role of landlord, with long-term or short-term renters paying cash to stay in the home. Before making an offer on an investment property, you’ll want to crunch the numbers to make sure it’s a solid investment. Similarly, consider what factors will be important to prospective tenants…access to public transportation, good schools, parking, and low crime rates.

Why it’s important to not confuse the two

It’s important that you’re totally clear about the difference and not use the terms “second home” and “investment property” interchangeably. Some people try to pass off their investment property as a second home to get more favorable financing, but you should never do this. If you lie on your loan application, you could be committing mortgage fraud, which is a federal offense.

Your lender’s underwriting team is aware of this possibility, so don’t try to pull the wool over their eyes. A single-family residence by a lake that is located in a completely different state from the borrower’s primary residence is much more acceptable to be categorized as a second home by a bank underwriter. A multifamily-unit property with rental income in an urban area is likely to be treated as an investment property.