Perhaps your family has always dreamed of having a second home. Maybe you refer to it when dreaming out loud as your “vacation home.” Perhaps, too, you have another dream of having residual income in the form of a rental property. Before you consider comingling your dreams, sit down and discuss it with a professional familiar with this subject. There are pluses and minuses of both types of property. The differences between the two are there, however subtle.
Second Home/Vacation Home
This property is most likely a single-family home some distance away from your primary home. You can use it when you go on vacation, and maybe you let friends and family stay there on occasion. You do not make any serious money from owning this property.
Having a second home may be cost-effective for you in the long run if it’s in a location where you vacation frequently. In fact, you might not have to spend as much as you do on hotels and eating meals out if you can stay in your own place and cook in your own kitchen. Regardless of if you save money, you are not actively earning extra income from this home.
Lenders prefer you to have your second home at least some distance from your primary residence. If it’s nearby, they will wonder why you need two homes so close to each other. If you say you’re buying a home for a vacation home but end up renting it out, that will cause you legal problems such as fraud. So you must understand why the rules for locations of each type of property are in place.
Investment Property/Rental Property
When you purchase a property separate from your primary residence and you hope to make some extra income, this needs to be a different property than your second or vacation home. An investment property can be for single or multiple families, and it can be located anywhere. Lenders don’t mind if you buy a property to rent out that is on the same block where you live or across the country.
Second homes have a lower tax rate than investment properties. You can often write off interest on your mortgage for a second home. You are allowed other write-offs for rental property such as repairs and renovations as well as some other expenditures. You might also be able to write off a certain amount due to lower market rates for the rental property that you can’t on a second home. An investment property also allows for write-offs if they lose money instead of making it.
Now for the confusing part. It is possible to have a second home that you are allowed to make some income from. The tricky part is knowing what percentage of the year you need to stay in the home and how many days a year you can rent it out. This is a conversation that would be best had with your attorney, financial advisor, and/or Realtor.