You hear these terms thrown around all the time: Second home, investment property, vacation home, rental property. But is there any real difference among them? And does it even matter what you call it?
As it turns out, there are some very big differences between second homes and investment properties, especially if you are financing it.
âBoth are fantastic ways to build wealth over time by capturing the appreciation of a real asset,â says Tony Julianelle, CEO of Atlas Real Estate in Denver. However, âboth come with inherent risks and expenses that should be carefully considered when making a purchase.â
As with any real estate transaction, you’ll want to do your homework and make a smart choice for your wallet, no matter which path you go down. We chatted with experts to get the scoop.
What is a second home?
A second home is just that: a second property where you and your family spend time, away from your primary home. You might also hear a second home referred to as a vacation property. You may rent it out for a few days each year on Airbnb or VRBO, but you primarily use it yourself.
Buying a second home makes financial sense if there’s one particular vacation spot you visit regularly. Why spend a fortune on hotels or Airbnb when you can own your own piece of paradise that will hopefully appreciate in value over time?
âLet’s say you live in San Francisco, but you are an avid skier in the winter and like to hike in the summer,â says Rachel Olsen, a real estate agent in California. âIf you spend many weekends and vacations inÂ Lake Tahoe, it may make sense to purchase a second home there.â
What is an investment property?
An investment property, on the other hand, is one that you purchase with the explicit intention of generating income. The investment property could be right next door to your own home, or it could be in another stateâit doesnât really matter. Youâll be playing the role of landlord, with long-term or short-term renters paying cash to stay in the home.
âNever forget that an investment property is all about the Benjamins,â says Lamar Brabham, CEO and founder of financial services firm Noel Taylor Agency. âThe entire point is to turn a profit. No emotions, no affection.â
Before making an offer on an investment property, youâll want to crunch the numbers to make sure itâs a solid investment. Similarly, consider what factors will be important to prospective tenants (e.g., access to public transportation, good schools, parking, and low crime rates).
How to finance a second home or investment property
If youâre paying cash, you can skip this section. But if you need a mortgage for your new property, you should know that financing a second home or investment property is very different from financing a primary residence. And, while mortgages on second homes and investment properties have some similarities, there are also some key differences.
Interest rate: You can expect to see a higher interest rate for both second homes or investment properties than for primary homes. Why? Because lenders view those transactions as riskier. If you get into a tight spot with money, youâre far more likely to stop paying the mortgage for your second/investment property than for your primary home.
Qualifying: Whether you’re buying a second home or an investment property, you might need to do some extra legwork in order to qualify for that second loan. Your bank may require you to prove that you have healthy cash reserves (so it knows you can afford both mortgages). It’ll take a long, hard look at your overall financial situation, so be sure everything is on the up and up before you apply.
Down payment: Depending on your situation and the lender, you might also need to bring a larger down payment to the table for an investment property or second home, typically 15% to 25%. Again, this is because the bank wants a bigger cushion to fall back on in case you default.
Rental income:Â If youâre buying an investment property, your lender might allow you to show that anticipated rental income will help cover the mortgage payments. However, proving how much rental income the home will generate can be complicated. Prepare to pay for a specialized appraisal that takes into account comparable rents in your area.
Location:Â Your lender may require a second home to be 50 to 100 miles away from your primary home. An investment property, however, can be anywhere in comparison to your primary home, even next door.
Taxes: Federal income tax rules are different for vacation homes and investment properties. Generally, you’ll treat your second home just as you would your first home when it comes to taxesâif you itemize, you can deduct the mortgage interest you paid up to a certain limit. (The rules vary if you rent out your second home for part of the year.) If you own an investment property, you get to deduct the mortgage interest, plus many of the expenses that come with operating a rental business, but you also have to report your rental income, too.
Why it’s important to not confuse the two
Itâs important that youâre totally clear about the difference and not use the terms “second home” and “investment property” interchangeably. Some people try to pass off their investment property as a second home to get more favorable financing, but you should never do this.
If you lie on your loan application, you could be committing mortgage fraud, which is a federal offense.
Your lenderâs underwriting team is aware of this possibility, so donât try to pull the wool over their eyes. Theyâll take the big picture into account when deciding what loan terms to offer you, says real estate attorney David Reischer.
âA single-family residence by a lake that is located in a completely different state from the borrower’s primary residence is much more acceptable to be categorized as a second home by a bank underwriter,â he says. âA multifamily-unit property with rental income in an urban area is likely to be treated as an investment property.â
Bottom line: Keep everything aboveboard, and you wonât have to worry about a thing.
The post Second Home vs. Investment Property: What’s the Difference? appeared first on Real Estate News & Insights | realtor.comÂ®.
Buying a home is one of the biggest decisions a person can make. Itâs the culmination of years of intense saving and budgeting, months of open houses, and weeks of late-night strategizing and offer planning.
In 2020, buying a home has gotten even harder as the COVID-19 pandemic has swept across the United States. Shopping for real estate during a crisis has always been difficult, but necessary safety measures taken to stop the spread of the virus have had a noticeable impact on how most people shop for homes.
One silver lining of this unfortunate situation is that many people in the real estate industry are finally seeing how technology makes the home buying process easier on both buyers and sellers. At Homie, we understand how technology like ours can help buyers and sellers save time and money. Letâs explore how you can leverage technology and other strategies to save money when you buy a home.
Get Your Finances in Order
If youâre thinking of buying a home, the first thing you should do is take a long, hard look at your finances. The two most important financial factors are the amount you have saved for a down payment and your debt-to-income ratio.
The down payment amount is simple. Most of us grew up thinking that 20% was standard, but that isnât the case anymore. According to a 2017 industry survey, most homeowners only pay 7% down. Letâs all breathe a collective sigh of relief! With the average home value in Idaho rising every year, itâs a huge relief to know that you donât have to save the full 20% down payment.
While youâre saving for the down payment, you also need to think about your debt-to-income ratio (DTI). This value compares what you make each month to what you owe. You can still buy a house if you have debt from student loans or another source, but you need to ensure your DTI is as low as possible, preferably at or below the 28% standard.
Get a Great Deal on a Loan
Once youâve gotten your finances in order, you can start exploring mortgage rates and loans. Most people start with their bank. Thatâs a good start. However, they often make a critical mistake: they donât shop around for a good rate. If you only check at your bank, youâre missing great deals from companies like Homie Loans. Theyâre so confident no one else can beat their locked loan rate that theyâll give you $500 cash if you find a better deal.
Homie Loans doesnât just give you a good rate, the entire application online, so you donât even have to leave the house to get approved.
Explore Federal Loan Programs
In addition to shopping around for a great mortgage rate at private companies and commercial banks, you can save tons of money by checking out your options for federal home buyer programs.
These programs are designed by the government and government agencies to ease the burden of homeownership. Each program is different: some require applicants to fall into certain income thresholds, while others are designed to assist veterans or individuals looking to buy homes in rural areas.
Idaho-Specific Programs for Down Payment and Cost Assistance
In addition to exploring federal home loan programs, many state agencies in Idaho have these programs available to residents. The Department of Housing and Urban Development has state-by-state guides for homeownership assistance programs, and lists many area-specific programs throughout Idaho.
Depending on where you live, you may be able to find specific assistance for homeowners in your region. These programs may be smaller, but since theyâre regional, itâs usually easier to talk to a person on the phone and get practical advice for getting started on your journey to homeownership.
Look Outside Your Area
If youâve started your search and all of the suitable homes in your area are out of your price range, you may want to expand your search. The switch to remote work has affected many of us, making cities and other centers of work less reliably desirable. If youâre currently working remotely or have the opportunity to do so in the future, you may be able to expand your search to include larger homes in less urban areas.
Buying in a more urban location like Boise might also get easier with the rise of remote work. Since Boise is such a student-heavy town, classes and work going virtual have opened up real estate in the city. If youâre looking for a good deal on a smaller urban home or condo, this may be a good time to invest.
Leverage Technology by Buying a Home With Homie
Another great way to save money when youâre buying a home in Idaho is to use a service like Homie. Instead of paying a high percentage of the final costs, youâll pay your Homie agent a low flat fee.
Homie also leverages technology to make the home buying process easier. The Homie family of companies makes everything that much smoother. Weâve brought everything from the mortgage to insurance under one roof, ensuring you donât have to run all over town to get papers signed and contracts approved. It all happens through Homie.
The best part of working with a Homie agent while buying a house is the refund of up to $2,500 we send you at the end of the process. The Homie team is always here to help buyers in Idaho save money. Get in touch with us today to start your journey towards homeownership.
Get more homebuying tips!
4 Ways to Outsmart the Competition When Buying a Home
5 Tips to Help You Afford Your First Home
Common Home Buying Fears and How To Overcome Them
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The post How to Save Money When You Buy a Home in Idaho appeared first on Homie Blog.
Imagine finding your dream home, then, a week before closing the deal, losing your jobâand the house. House hunting during the coronavirus pandemic is no picnic.
COVID-19 has caused seismic changes not only to real estate markets, but also to the lives of home buyers hit with layoffs, furloughs, and other financial challenges. Just ask Katerina Rieckel, a digital strategist, knitwear designer, and first-time home buyer who, with her husband, was set to close on a glorious farmhouse in upstate New York in March.
But about a week before sealing the deal, Rieckel was laid off, which meant that she and her husband, a claims adjuster, could no longer afford the place.
As a part of our new series, “First-Time Home Buyer Confessions,” we asked Rieckel to share her story, and the hard-won lessons she wants to share with other first-timers.
Let her experiences show that even unemployment doesn’t need to spell the end of a house huntâalthough it may require you to dust yourself off after a loss and try, try again.
Location: Troy, NY House specs: 1,544 square feet, 3 bedrooms, 2 bathrooms List price: $249,900 Price paid: $245,500
2020 has been a wild one. How did you end up buying a home in the middle of a pandemic?
We started looking for a house a year ago, about halfway through the summer. At the time, both my husband and I had recently got new jobs, so the first issue we ran into was getting pre-qualified for the mortgage without a long track record at those companies. We also both felt pressure, as our jobs were very new.
What were you looking for in a house, and what was your budget?
We were looking for a house in the country that was move-in ready, private with at least 5 acres. We started off with a small budget, max $200,000, which made our choices more narrow.
Our search continued well into the winter, and around January 2020, we finally saw a house that was all we ever dreamed of and more. It was over our budget, at $229,000, but it had been listed for over a year, so we felt there was a good chance we could get it for less than the asking price.
What did you love about this house?
It was a beautiful, slate-blue farmhouse sitting on top of a hill, surrounded by woods. The house was warm and inviting, with chickens running around, as well as a big diving pool, and a workshop in the basement connected with a two-car garage. We got along with the owners really well, and we were going to keep the chickens. Everything went very smoothly, until just over a week before closing.
So what went wrong?
It was March, and COVID-19 hit hard. The digital marketing agency I worked for had clients pause their work for unknown time. I was laid off, which meant we couldn’t afford the house anymore, and had to back out of the deal.
I was crushed. We didn’t know what was going to happen, and the country was under a lockdown. We had plans for my parents to come visit us in our new house, but instead, I ended up with no job, no house, and I couldn’t see my family, since they live in Europe.
In the summer, I was very fortunate to get my job back. So we resumed our house hunt and began to search for a new contender.
When you started the search again, how had COVID-19 changed the market?
The housing market in upstate New York got totally crazy. I heard there were houses being sold within hours. The market was just incredibly competitive, and not many houses were being listed, as a lot of people didn’t want to let strangers in their house during the pandemic.
We saw about seven to 10 houses in person, but they usually ended up disappointing us, with some strange arrangements. For example, one house had around 25 acres, but half of that acreage was on the other side of the road, behind other people’s houses, which made it almost impossible to use.
With such a competitive market, how did you end up finding the right house?
Finally, around halfway through the summer, I saw a house listed that I hadn’t noticed before. I called on it right away and set up a showing that evening.
The real estate agent told me we were really fast, as he had just relisted this house. Someone had been buying it, but backed out of the process because of personal reasons.
How did you know this house was the one?
The house had over 10 acres, it was in the country, and about 35 minutes to Troy. It was move-in ready, but definitely needed upgrades, as it looked like it got stuck in the ’80s.
Even though we didn’t like the style that much, we felt instantly comfortable and decided to put in an offer that same evening. It was partly due to the pressure of the market, but in the end, we are really happy we made this decision.
What surprised you most about the home-buying process?
Nothing prepares you for the amount of aggravation you have to go through. Buying a house is like getting a second job for about three months.
What’s your advice for aspiring first-time home buyers?
Don’t trust the photos! The photos got me a few times. For example, a lot of times, the photos of the house are taken so that you can’t see the neighboring houses.
You think, “Wow, that looks so private!” Then you drive there, and you realize there’s a house sitting right next to it. Since privacy was very important to us, we got disappointed a few times by this. We started doing drive-bys first, before going in with a real estate agent, whenever possible.
Anything else home buyers should look out for?
Call the real estate agent and ask a lot of questions before you even go see the house, like what the property and school taxes areâvery important around here.
You also want to know what kind of heating the house has, as electric bills can really add up over the winter.
The driveway can also be a huge issue, which is why I think the first house we were buying was for sale for such a long time. It had a pretty steep driveway, which was definitely an all-wheel drive kind of thing in the winter.
We also changed who we were financing with while we were going through closing. We needed someone well-informed about the economy, who knew what they were doing and was ready to act fast.
Our first mortgage broker didn’t tell us as soon as interest rates started to go upâand basically sat on the information for a while. This is when we stopped trusting this person and went to work with a bank instead.
Maybe the best advice is not to fall in love with a house too quickly, since there can be so many setbacks that you will not see coming.
The post ‘I Lost My Jobâand My Dream House’: How This First-Time Home Buyer Bounced Back appeared first on Real Estate News & Insights | realtor.comÂ®.