Differences Between Second Homes and Investment Properties

If you’re new to the world of investment properties, you may have heard that there are some significant discrepancies between second homes and your investments. Read on to learn more about variances in down payments and interest rates, as well as what happens if you claim an investment property that is a second home. These are the differences between second homes and investment properties.

What Is a Second Home?

Simply put, a second home is a second property you purchase after your current home that you live in for part of the year. Some lenders require proof that the property is 50 miles (or more) from your current house to be classified as a second home. Vacation homes and houses used for work are perfect examples of second homes.

What Is an Investment Property?

Investment properties are residences that you plan to rent to tenants or flip for profit. While second homes are one-unit properties, investment properties can have multiple units.

Down Payments and Interest Rate

Investment properties come with a higher risk of defaulting, so lenders will ask for a higher down payment than with a second home. While a second home generally requires a 10 percent down payment, investment properties can command down payments of 15 or even 20 percent. Mortgage rates can also be higher for investment properties, sometimes 0.875 percent higher than those for primary residences.

False Claims

With that said, investors may feel tempted to claim a property as a second home rather than an investment property to enjoy lower down payments and interest rates. However, this is called “occupancy fraud” and could put you in the crosshairs of the FBI. To avoid sticky situations like this, use a leasing and property management company to handle your claims for you! Now that you know the differences between second homes and investment properties, make the best decision for your situation and never file a false claim!