For decades, people have flocked to the Jersey Shore to set up their “home away from home” summertime digs. That means renting a place at the shore for up to three months at a time. But the longer you wait, the harder it can be to find a place. Many summer rentals fill up well ahead of the summer season. That’s when some people choose to stop renting and, instead, purchase a second home at the Jersey Shore. This guarantees them a place to stay during the summer. Others chose to invest in a beach town home to expand their financial portfolio. Many people use the terms “second home” and “investment property” interchangeably. But, did you know that there actually is a difference between the two?
Second Home vs Investment Property
Second Home
A second home is exactly that…a home in which you live in part of the year. That could mean a week or two in the spring, the entire summer, and a couple of weeks in the fall. However much time you stay there does not matter. Many times, people refer to these as their vacation homes. When you tend to visit the same area over and over every year, it makes sense to take the money you would pay in rent or hotel fees and, instead, purchase a property.
Most lenders insist that your second/vacation home must be located at least 50 miles from your primary residence to be considered a second home. Tax laws allow for homeowners of a second/vacation home to rent that property out when not living there. However, it cannot add up to more than 180 days per year. Otherwise, that is considered an investment property and subject to different rules (and taxes).
Investment Property
People buy investment properties simply to generate income. The term “Investment properties” covers long and short-term rentals as well as “flips” and commercial properties. Before you buy an investment property, do your homework. Make sure the numbers make sense and the location offers a viable renter pool to determine whether or not it offers a good return on investment.
How Mortgages Differ
Lenders tend to be more lenient with second homeowners than with investment property applicants. Even so, credit requirements for both second homes and investment properties are much tighter than they are for primary residences. Lenders consider investment properties a higher risk than a second home. Why? With less personal connection to an investment property, owners tend to ditch those before they ditch a vacation property when a financial hardship occurs. Also, expect to pay more in interest on either type of property than you would on a primary residence.
Downpayment requirements run higher than a primary residence as well. Lenders expect at least 10% down on a second home. But they require around 20-25% for an investment property. Why the difference? Again, perceived risk. When financial hardships happen, investment properties tend to be the first things to go. Vacation homes go “bye-bye” well before a primary residence. Therefore, banks want to see that you are serious about this second home/investment property purchase.
To qualify for a second/vacation home mortgage, you must prove that you can afford to pay both mortgages. Sometimes, you may need to show as much as six months worth of payments for both properties saved up in reserve. This rings true for investment properties as well. However, you may also need to show some property management experience to qualify for an investment property loan.
If you have any questions about the difference between the two types of properties, talk to your lender first.
Sherri Lilienfeld, Apex Prime Realty, Your Source for Jersey Shore Real Estate