Second Home versus Investment Property

Many people rent houses and condos in Florida for vacations rather than staying in a hotel. Beach vacation rentals are popular today. Additionally, some rent houses for 6 months or longer due to a temporary job assignment in the area or other reasons.

Obviously, there are owners of these houses and condos — maybe you’re one of them.

Second Home versus Investment Property

It’s important to know that there’s big differences in financing a second home versus investment property.

Second Home

Let’s start this discussion at the point where you say, “I want to purchase a second home!” Most likely, you want to make that purchase (I’m assuming in Florida) because you live out of state and want a vacation home.

Vacation homes are awesome! You own it and can go there whenever you want. No spending the time and energy looking for a hotel or other rental. Furthermore, when you need to make reservations, you must make sure you plan months ahead, as the nicest places get reserved quickly.

You never have to make a reservation at your own home! (Not to mention all the other conveniences.)

When do you want to vacation? For how long? Last-minute? No problem!

The interest rates are typically lower for a second home mortgage. Remember, this assumes you won’t be renting the house out at all to generate income. It’s merely your second, or vacation home.

The qualification process is also more straightforward than an investment property (where you intend to rent out the home on a regular basis).

Investment Property

In contrast, some owners use their investment home for their own vacations and rent it out during the times they aren’t there. For these owners, the benefit of renting out their home provides a way to defray some of the costs of keeping a second home in a desirable destination.

If you need to rent out your property to afford it, then it becomes an investment property, not a second home, and the financing rules are different.

In this case, your lender will want to see an appraisal with a comparable rental schedule. This document tells the underwriter the property’s potential income.

The lender counts 75 percent of the anticipated rents as income to you, and the monthly mortgage, taxes and insurance are added to your expenses when calculating your debt-to-income ratio (DTI).

Investment property mortgages almost always require at least 20 percent down because it’s very difficult to get mortgage insurance for these purchases. Investment property mortgage rates can be 50 basis points (0.50%) percent or higher than rates for primary residences.

The above information is taken from this article.

Next Steps

I’m available to answer questions for you regarding a second home versus investment property. I will also connect you to mortgage lenders to assist you.

Whether your circumstances mandate you financing a second home or an investment property, contact me to help you with your property search. Additionally, read my blog article, “Purchasing a Second Home.”

I look forward to talking with you!

Dana Davis
Dana Davis Properties/DHR (Distinguished Homes Realty)
Phone: (386) 569-4998