Second Home / Investment Home BasicsDo You Mean A Vacation Home Or An Investment?

If you are purchasing a second home there is plenty of ambiguity in the terms used to describe different types of real estate for ambiguity and misunderstanding. That is why there are two perspectives that need to be explored to get a valid definition. Read on to get the breakdown.

The dividing question is whether you intend to use the second property entirely for your personal enjoyment and you have the resources to fund it. Or you need to finance the project to a greater degree and recoup the costs with rental income. In the latter case you might wish to maximize rental income and treat it as a pure investment or you could seek a balance between repayments and enjoyment.

Funding Is The Question And The Answer

The difference in status matters if you are borrowing to fund the purchase of your second home. Loans for vacation homes are usually less expensive than loans for investment properties. Also investment properties will usually have a requirement for a larger minimum down payment. Loans for vacation homes will have restrictions on where they are located, either near some resort location or a minimum distance from your main home.

So the one extreme is the pure vacation home, on the other is the pure investment property, and in between there are the grey areas that lie within the investment property category. You might consider purchasing an investment property primarily, leasing it out as a vacation rental but reserving a particular time of year for personal use.

The additional cost of funding in interest and deposit can be offset by the rental income you receive. For those who have the resources to either self-fund or partially fund, this strategy will yield a minimal cost or possibly even a profit throughout the year.

So investment properties and second homes are really two things in the eyes of the law. However, as a resourceful owner you can make an investment property act as a second home and still get the benefits of both. However, if the idea of a second home that has no investment function appeals to you and it is affordable then why not pursue that option?

Opportunity Outlook In Second Homes

For vacation homes and investment properties the long-term outlook is good. For those of us with the ability to invest and to be patient the value of the property will prove to be a strong asset over time. Ultimately you may wish to cash out and use the proceeds to fund your retirement. Or you can exchange for a larger like-kind property, deferring capital gains for some serious tax advantages under a 1031 exchange.

In every case you should be aware of what you are getting into before you make any commitments. Speak with your financial advisor and your local real estate expert, either can point out the possibilities. You may be surprised at the potential that you can unleash by purchasing the type of vacation or investment home that is right for you.