In the real estate market, buying a property isn't always about finding a place to call home. Many individuals purchase properties as part of their investment portfolio or for other personal reasons. However, there is often confusion surrounding the differences between buying a second home and buying an investment property. To make informed decisions, understanding these differences is critical. Did you know that rental property owners earn roughly 45% more than the median household income, demonstrating the potential financial benefits of owning investment properties?
Fast Facts about Investment Properties
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As per BankRate, the United States has approximately 48.2 million rental units housed within 19.95 million properties, based on Census data.
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Individual investors account for 70% of all rental property owners, whereas for-profit corporations make up 18% but possess 45% of all rental units.
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Roughly 34% of households in the United States are rentals, with 42% occupying single-family homes and 36% living in apartments of five or more units. Almost half of these renters (47%) are under 30 years old.
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As of June 2022, the average monthly rent exceeded $2,000, with San Jose, California, leading as the priciest rental market at $3,361 a month. In contrast, Youngstown, Ohio, was the least expensive at $960.
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The National Equity Atlas reported that 16% of renters were delinquent on their rent payments as of May 2022.
Fast Facts about Second Homes
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Based on information from Gitnux, there were close to 1.5 million second homes in the U.S. in 2018, indicating a growing interest in owning a second home for various purposes.
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Sales of second homes in the U.S. soared by 30% in 2020, suggesting an increased demand for the autonomy and adaptability that comes with owning a second property.
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Interestingly, 24% of second-home buyers in 2020 had plans to rent out their property for short-term periods, a clever way to generate additional income!
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The practice of co-owning second homes is on the rise, with approximately 5% of second homes in the US jointly owned by multiple families.
Exploring the Concept of a Second Home
A second home typically refers to a property that an individual or family buys in addition to their primary residence. This property is not primarily meant for income generation but is often used for personal purposes, like vacations or a weekend getaway home. People also buy second homes to live in part-time due to work or personal commitments or as a potential retirement home. As these homes are not primary residences, they come with their own set of rules regarding mortgages, tax implications, and other factors.
Understanding What an Investment Property is
An investment property, on the other hand, is a real estate purchase that is primarily intended to generate income, either through renting it out, reselling it for a profit, or both. Unlike second homes, investment properties are not typically used by the owners for personal reasons. Instead, they are treated as business assets with the express purpose of making a profit. Investment properties can range from residential houses to commercial buildings or even vacant land.
Distinguishing Mortgage Factors for Second Homes and Investment Properties
Variances in Mortgage Rates
Mortgage rates are a crucial factor in the decision between buying a second home and an investment property. Generally, interest rates for second homes tend to be similar to those for primary residences, while investment properties often attract higher rates. This is primarily due to the increased risk associated with investment properties from the lender's perspective.
Differences in Down Payments
When it comes to the initial payment for your property, known as the down payment, second homes and investment properties again differ. Down payments for second homes can sometimes be as low as 10%. Investment properties, however, usually require a larger down payment due to the higher risk associated with these types of properties.
Qualifying Requirements and Their Disparities
Qualifying for a mortgage for either a second home or an investment property also comes with distinct requirements. Lenders typically require proof that the borrower can afford both their primary residence and the second home without the need for rental income. For an investment property mortgage, lenders may consider projected rental income in the borrower's eligibility.
How Rental Income Factors In
One of the significant differences between a second home and an investment property is the potential to generate rental income. While you might occasionally rent out your second home, it's the investment properties that are primarily purchased with the intent to earn rental income.
The Implications of Misrepresenting Your Investment Property as a Second Home
Post-Closing Conversion of Your Second Home into an Investment Property
Misrepresenting an investment property as a second home is considered mortgage fraud and comes with severe legal consequences. That being said, converting your second home into an investment property after the mortgage closing is a different matter. This is often permitted but usually requires you to inform the lender, and it may have implications on your mortgage terms and property taxes.
Work with Amy Crane
Amy Crane is widely acclaimed by her clients for her unwavering commitment, treating every listing with care and attention as if it were her own. She prides herself on being constantly accessible to her clients and maintains personalized connections throughout their real estate journey. Her comfort level in discussing high-end features and construction components across a wide range of price points sets her apart.
The awards and commendations she has garnered are a testament to her hard work and dedication. Beyond her professional life, Amy indulges in hobbies like restoring historic homes, playing golf, and treasure hunting for antiques. Actively involved in charity work, she's also a proud parent to two incredible children. Her approach to real estate is marked by creativity, determination, and empathy, making her an effective advocate for her clients.
If you're looking to buy or sell a home or have any questions about the Illinois real estate market, contact Amy Crane today.
If you're looking to buy or sell a home or have any questions about the Illinois real estate market, contact Amy Crane today.
