Many homeowners use the terms “investment property” and “second home” interchangeably to describe a property that is not their primary residence, but there are several distinct differences to note between the two.
According to the International Accounting Standards, an investment property is property (land or a building or part of a building or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. There are three types of investment property, including:
- Residential rental property
- Commercial property
- Property purchases to “flip”, meaning the buyer intends to resell the property for a profit
Because investment property is meant to make a profit, investment property loans have higher interest rates and require a larger down payment than second homes.
NOLO defines a second home as a residence that you intend to occupy in addition to a primary residence for part of the year. Homeowners typically use this property as a vacation home, but may also use it on a regular basis, like a condo located where you conduct business.
As homeowners are the sole users of second homes in most cases, second-home loans have significantly lower interest rates than investment properties. Second-home loans are also different from those of investment properties because they are usually presented with a list of mandatory rules, such as:
- The property cannot be subject to timesharing arrangements or rental pools
- The property must remain available for the borrower’s exclusive use at all times
- The borrower must occupy and only use the property as the borrower’s second home
If you are considering purchasing either an investment property or a second home, make sure you understand the difference between these terms and their loan processes. For more information on investment property loans and second home loans, please contact one of our loan officers.