Investment Property vs Second Home
The proverbial Great American Dream has undergone lots of changes in the last few decades and from the humble beginnings where a TV set was considered an absolute must in a household, the situation today is one of buying a second house after buying a primary residence. A man, after settling in his career, buys a home for his family. Second home is not in the thoughts of a man as he is busy arranging conveniences and luxuries for his family. However, when the man is free from earlier obligations, he decides to buy a second home. Whether a man buys second property to live in there sometime in a year or he buys it from the point of view of investing in a property, the fact remains that he is adding a property in his name. However, there are crucial differences between just a second home and investment property that need to be kept in mind while making this vital decision. This article attempts to highlight these differences to enable readers to base their decision accordingly.
There is no doubt a great incentive for people to buy a second home these days in the form of historically low interest rates. However, the most pressing question remains unsolved, and that is whether to buy a second home or to go in for an investment property. As the name implies, a second home is another home for you, in addition to your primary residence. So, if you have a home in a city where your office is, and you buy a home in a mountainous region or a beach, you are buying a vacation home in the name of second home. However, if you have a primary residence and you buy a second property in a resort with the intention of earning from it by renting it out, your second property is an investment property.
Interestingly, the interest rates charged by lenders for a second home are less than what they are for an investment property. One reason for this is the perceived extra risk associated with the loan. This difference could be as low as 1/4th of a point to one full point. The difference depends upon the borrower, the bank, and the type of property being bought.
Knowing that the type of property you are buying could mean a higher interest rate, you should plan accordingly and engage with your lender in advance. Meeting your CA and the bank before you finalize a deal could make a big difference in the interest rate charged from you by your lender.
What is the difference between Investment Property and Second Home?
• When a person buys a second property for his own living purposes, he is actually buying a second home for himself.
• When a person buys a property from the point of view of making a steady income from it, it is considered an investment property
• Lenders charge a higher rate of interest on a property that is bought with investment point of view, while for a second home, the rate of interest is same as that for a primary residence.