Investment Properties vs. Second Homes

August 25, 2020 By ,

Whether you’re interested in generating additional income or creating the perfect vacation spot, buying a second home can be an excellent investment. Historically low interest rates and virtual appointments have kept the housing market in motion over the past few months, so now could be a great time to buy.

Differences in Financing

Though similar in purpose, second homes are financed differently than investment properties. Because investment buyers aren’t living in the property, some lenders will consider these loans “riskier” than second homes, resulting in higher interest rates and larger down payment requirements. However, both investment properties and second homes are predominantly purchased with conventional financing.

At PacRes, we have a variety of loans to meet your unique, long-term financial goals. Below we compare the differences between a second home loan and an investment property loan.

Second Home

  • Minimum 10% down payment
  • 1-unit properties only
  • Gift funds allowed
  • Buyer must live there at least some of the time during the year (time amounts will vary based on loan requirements)

Investment Property

  • Minimum 15-25% down payment
  • 1 to 4-unit properties allowed
  • Gift funds not allowed
  • Buyer can rent out the property

Renting Out an Investment Property

There are various methods of renting out an investment property, such as long-term renting, short-term renting, and the ever-popular vacation renting.

How to Rent Out Through Airbnb

As an Airbnb host, you can set your own rental price based on your city, neighborhood, and amenities. The money you make back from renting could even help pay off the mortgage in your current house or help pay for a second home that you plan to use yourself.

Anyone can host. All styles of home are welcome with Airbnb. It’s free to create a listing and easy to sign up. As a host, you will be expected to follow basic requirements that protect both you and your guests.

It’s free to list! Once you receive a reservation, you will be charged a service fee. This will generally be about 3-5% of your listing price. Fundera also recommends that Airbnb hosts take into consideration the following factors that could impact how much you get paid:

  • Weekly or monthly discounts
  • Weekend or seasonal pricing
  • Payment for any co-hosts you enlist
  • VAT in specific non-U.S. locations

You can set your own price. One of the most beneficial factors of renting out your space through Airbnb is the ability to set your price. The price you charge is entirely up to you and can be changed based on demand, season, events in your area, or even additional fees you might foresee. Airbnb also has a “Smart Pricing” tool that allows hosts to set their prices to automatically go up or down based on changes in demands for similar listings.

Potential Tax and Earning Changes

As a host, you’ll have to report your Airbnb income and expenses to the IRS if you rented the space for more than 14 days of the calendar year, similar to if you were to rent out an investment property on your own.

If you earn more than $20,000 and had 200+ reservations over the calendar year, Airbnb will send you a Form 1099-K. Hosts who have had their taxes withheld from their payouts will receive a tax form from Airbnb to accurately report their income. Read more here.

Depending on your location and size of listing, Airbnb will give you an average monthly earningThese numbers will significantly vary by your circumstances, especially during the ongoing pandemic.

Ready to find out which loans you may qualify for? Connect with a Mortgage Advisor today to learn more.

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