Second Home vs. Investment Property: What's the Difference?

Are you interested in buying a vacation home that you can rent out when you aren't there? How about a home in a vacation area that you live in during the winter months and rent to tenants for the rest of the year? Or do you want to buy a property to turn into an Airbnb, and use it occasionally yourself?

If you've considered any of these options, you should know that there's a difference between a second home and an investment property. Which category your property falls into can have major implications when it comes to obtaining a mortgage, as well as when filing your tax return each year.

What makes a property a "second home"?

The broad definition of a second home is a property you purchase and plan to live in some of the time.

To be clear, second homes can be rented to others. However, they cannot be exclusively for rental use. If you plan on buying a home and using it as a long-term rental property, it is an investment property and must be treated as such for financing purposes.

Second homes must also be a certain distance away from your primary residence, and they can only have one housing unit. In other words, a duplex or any property that is in the city you live in doesn't count.

There is no set-in-stone rule that mortgage lenders use to determine whether a property qualifies as a second home. Some lenders have rather strict rules on renting second homes, while others only require you to live in the home for 14 days or more each year to qualify as a second home. Some might not allow you to rent a second home at all, at least not at first.

While lenders might not all agree, the IRS has a pretty clear definition of what it considers a second home to be. If you use the home for at least 14 days each year or 10% of the days you rent it, whichever is greater, it is considered a second home for tax purposes. In other words, if the property rents for 200 days in 2024, you will need to stay there for a total of 20 days or more to meet the definition of a second home.

The tax definition is important, because the interest you pay on a second home loan can be deductible via the mortgage interest deduction. But the interest you pay on an investment property is not.

Two different types of mortgages

Here's why the definitions are important from a financing standpoint. The ways you finance second homes and investment properties are very different from one another. There are mortgages specifically designed for purchasing second homes and others specifically designed for investment properties.

The general idea is that second home financing is usually the better of the two, at least from a financial standpoint. Second home loans tend to have lower interest rates than comparable investment property loans. According to The Mortgage Reports, investment property mortgage rates tend to be 0.5%-0.75% higher than you'd get on a primary residence loan, while second home mortgage rates tend to just be slightly higher than primary residence loan rates.

Second home loans also have lower down payment requirements. For example, Fannie Mae's underwriting standards require a minimum down payment of 15% for a one-unit investment property (in practice, lenders often want 20%), but allow down payments as low as 10% for second home loans. However, it's worth noting that in both cases, a 20% down payment allows you to avoid mortgage insurance.

Mortgage lenders don't all have the same definition of what a second home is. And if your property doesn't meet all of its criteria, and you aren't living in it full-time, it will generally be considered an investment property. However, if the property you want at least meets the IRS's general definition of a second home, it could be a smart idea to shop around with a few different mortgage lenders to see if it qualifies for second home financing.

What is right for you?

To be sure, I'm not saying that one type of loan is good and the other is bad. Investment property mortgages can make great financial sense if you find a cash-flowing long-term rental property, especially one with more than one housing unit. But it's important for aspiring real estate investors, future Airbnb owners, and people who simply want a vacation home that can be rented when they aren't around to know the rules.