What's The Difference Between Second Homes & Vacation Homes

When it comes to the real estate market, there are a lot of terms you need to know. Some of these can be confusing. Others are incorrectly used interchangeably. The terms “second home” and “vacation home” are two that are very close in meaning, but aren’t the same. If you’re curious about their meanings, keep reading to understand the difference between second homes and vacation homes.

About Second Homes

Just as you might expect from its name, a second home is one that is meant to be a second dwelling for you to live in. It’s a property you purchase with the primary intent of residing there when you’re not in your main home. A second home can be located anywhere. It can be a smart financial investment if you visit a particular area frequently. Having a second home means you won’t need to pay for and secure lodging every time you visit. It’s also possible to rent out your second home occasionally, as long as making money isn’t your motivation for buying the property.

About Investment Properties

If you do wish to generate an income through real estate, an investment property is what you should look to buy. It’s possible for your investment property to be located in the same town where you live. It can be a single-family home or a multi-unit complex. Your tenants might be long-term renters or short-term visitors. The point of owning this property is to make money as a landlord. It’s best not to become too emotional about your investment property. Be sure to crunch the numbers and choose a property that makes sound financial sense.

About Financing These Properties

It’s important to distinguish between a second home and an investment property when you’re ready to seek financing. That’s because each has its own rules and terms. Confusing the two could actually lead to legal problems, such as being accused of mortgage fraud. Both second homes and investment properties are seen as risky by most lending institutions, so they’re likely to come with higher interest rates than primary residences. You’ll need to prove to your lender that you have solid financial resources and are a good risk for either type of loan. In fact, a larger downpayment may be needed to prove your worth and provide security in case of future default.

You may have an advantage when applying for a mortgage on an investment property. Being able to prove that you have potential rental income can help you to get financed. This may require a special appraisal. If you want a property to be considered a second home, it’s likely you will need to find a house located at least 50 to 100 miles from your primary residence. The big difference comes with regard to taxes. A second home is similar to your regular mortgage. Investment properties come with tax advantages such as added deductions.

When searching for homes for sale in the Twin Cities, it’s important to understand the difference between second homes and investment properties. Doing so will ensure you get the best terms and remain compliant with tax regulations.