Maybe you’ve always had dreams of owning multiple homes in different cities across the globe – you know, a beachfront property in Malibu, a gleaming penthouse in New York, a cozy cabin in Telluride. 

Perhaps your goal has always been to retire as a “snowbird,” and spend the chilly half of the year in California, before coming back to Chicago for a sunny spring. Or, perhaps, you’re the sort of person who’s always aspired to own one or more investment properties, who’s dreamed of renting out an apartment in the city or flipping a fixer upper suburban property for profit.

These are all wonderful real estate goals! But in order to make them a reality, it’s important to know some key terms and concepts. For instance? As you start setting plans in motion to purchase a second property, it’s crucial to know the difference between owning a second home and an investment property. 

While you may sometimes see these two terms used in the same breath, in reality, they are very different types of real property – with distinct considerations to keep in mind when it comes to obtaining financing or taking advantage of tax benefits down the line. 

Let’s explore the differences between second homes and investment properties in a little more depth. 

What Is a Second Home?

Broadly speaking, a second home is a residential property that you intend to occupy for a notable portion of the calendar year. 

Often, a second home is a vacation home, perhaps located in a beach town, or near a lakefront in the mountains. However, the definition of a second home is fairly broad, and may also include pied-a-terres in different cities, or a condo that you own in a location where you do work throughout the year. Generally speaking, in order to qualify for a loan on a second home, lenders will want to determine that the property is a significant distance away from your primary residence (a common rule of thumb is 50 miles, though the specifics will vary from lender to lender), and that it be usable year-round. 

What Is an Investment Property?

In contrast, an investment property is a piece of property that is purchased primarily to generate income. Common types of investment properties here in Chicagoland and around the country include residential rentals, commercial properties, and properties purchased with the intention of “flipping” – that is, reselling at a profit thanks to improvements or appreciation. 

Bottom line? The goal of an investment property is to generate profit – not provide a living space for yourself or your family. Unlike a second home, an investment property may be located near your primary residence. In fact, it’s quite common for someone to own one or more investment properties in the same town, perhaps even in the same neighborhood. You may be able to live in an investment property occasionally – but if you also use it as a rental for a significant part of the year, it may be considered an investment property for tax and financing purposes. Similarly, a property is generally considered an investment property if you hire a management company to oversee its occupancy or use. 

Second Homes Vs. Investment Properties: Mortgage Considerations

One area where the distinction between a second home and an investment becomes important is in terms of financing, as many lenders use different loans for these different types of property purchases. 

For example? In many cases, mortgage lenders may offer borrowers better loan terms on second home loans, compared to investment property loans. Lenders typically require greater down payments and charge higher interest rates for loans on investment properties than they do for those used for second homes (the reasoning being that borrowers are less likely to walk away from a property they use as a residence, compared to one they use exclusively as a business venture). In both cases, lenders typically charge higher interest rates than they do for primary residences; there may also be more significant qualifying requirements for obtaining a loan on an investment property or second home, including more stringent requirements for cash reserves to have on hand. 

Another crucial thing to bear in mind is that it can be considered fraud if you intentionally mislead your lender about your future property in order to obtain a loan – this can lead to significant fines and even the potential for a default on your loan agreement. 

Second Homes Vs. Investment Properties: Tax Considerations

There are some important tax considerations to keep in mind when it comes to second homes and investment properties. 

For one thing, there’s the matter of income drawn from an investment property. Broadly speaking, rental income from an investment property must be reported as taxable income, though expenses related to the maintenance of the property may be deductible. 

Second homes, broadly speaking, can offer similar tax benefits as primary residences, including the ability to deduct mortgage interest, property taxes, and mortgage insurance payments up to a certain amount. 

There Is More to Discuss

*Please note that while the information above is accurate to the best of our knowledge at the time of writing, this writing should not be construed as tax or mortgage advice.

Ultimately, determining the difference between a second home and an investment property is just one piece of the larger puzzle. If you have any more questions about what it takes to make your biggest Chicagoland real estate dreams a reality, don’t hesitate to get in touch with the attorneys and staff of the Gunderson Law Firm to keep the conversation going. 

Our team possesses unmatched professional expertise and insight, reinforced by years of experience and long-term connections throughout Chicago’s real estate, finance, title, and insurance industries. Our full range of real estate legal services includes:

  • Residential Real Estate
  • Commercial Real Estate
  • Purchases and Sales
  • 1031 Tax-Free Exchanges
  • Mortgage Conveyancing & Advice
  • Real Estate Litigation
  • Title Insurance
  • Title Examinations & Disputes
  • Asset Protection / Trusts
  • Estate Planning / Wills
  • Reverse Mortgages
  • Property Development
  • Condominium Law
  • Foreclosures

Have any questions? Don’t hesitate to get in touch whenever you’re ready to talk shop.