Owners of a second home can rent it out from time to time and the property can still qualify as a second home. This is thanks in large part to the rise of apps like Airbnb. Fannie Mae has made this distinction official, which makes owning a second home more attractive to many because the costs can be offset by some rental income. A second home typically qualifies for a more affordable mortgage with a lesser down payment than a normal investment property would. Those interested in purchasing a second home should think about finding a financial advisor to help them fully understand how the purchase plays into their larger investment portfolio.
What Qualifies as a Second Home for Renting?
What constitutes a second home or residence is defined by the IRS for tax purposes. In order for your home to qualify as a second home and not an investment property, you must use the property as your personal home for the greater of one of these requirements:
- 14 days per year
- 10% of the total days rented to others
If you’re getting a loan on your second home, then the lender is likely to have more requirements that you must meet in order to qualify. However, this can vary from lender to lender.
Once you classify your property as a second home for tax purposes and get approved by your lender during the mortgage process, then you’ll need to make sure you live up to those rules for the long haul. Treating it as a rental or investment property after the fact could open you up to potential liability for fines or additional fees, and you could be investigated for occupancy or mortgage fraud.
Second Home vs. Investment Property
A second home is a one-unit property that the owner uses as a recreational residence for at least part of every year, in addition to their primary residence. An example would be a beach house or a cabin on a lake that you visit a few times a summer.
An investment property, on the other hand, is purely for earning income and long-term growth. For instance, this could be a condo that’s rented out for most of the year or a home you fix up and flip.
The reason behind the classifications of second homes or investment properties is namely how lenders and the IRS look at each type of property. Mortgage rates are typically lower for second homes than for investment properties, and many lenders will require less of a down payment on a second home (as low as 10% in some cases).
Second homes and investment properties are also treated differently where taxes are concerned. The two most important differences are:
- Expenses such as maintenance, utility bills and depreciation can be written off on your taxes for an investment property, but not for a second home.
- Mortgage interest is deducted from rental income as part of your expense write-offs with an investment property. On the flip side, it’s deducted along with mortgage insurance or property taxes on a second home.
For both types of properties, all rental income must be reported and is taxable if the property is rented out for at least 14 days per year.
Getting a Mortgage on Your Second Home
The rules for obtaining a second home loan vary by lender. In general, though, lenders often have similar requirements when looking at whether your property qualifies as a second home. Fannie Mae has made it clear that second homes might be rented out, but the expectation is that the owners abide by the rules below.
- Must be occupied by the owner for some portion of the year (greater than 14 days or 10% of the time it is rented out)
- Is a one-unit home
- Can be used year-round
- One owner of the property
- Isn’t rented full-time and is not under a timeshare arrangement
- Can’t be operated by a management firm that has control over occupancy
- Must be a reasonable distance away from the primary residence (it helps if the house is in a resort community or area, to give the feel of a recreational residence and not a rental property)
If the property you’re wanting to buy doesn’t match these requirements, then you may want to, instead, consider making it an investment property. Speak with your financial advisor or accountant about the implications of doing this on your own.
Costs to Consider When Buying and Renting a Second Home
Before buying a second home, you should consider the costs associated with the purchase. Since a second home can’t be rented out as often as an investment property, you may not be able to cover all of these costs from rental income alone.
- Maintenance: You’ll be on the hook for basic upkeep, seasonal maintenance and any cleaning or repairs due to renting out the property. Keep in mind that some neighborhoods, where many of these recreational homes are located, have specific upkeep requirements.
- Travel expenses: Since your second home needs to be a bit away from your primary residence, and you’ll have to be there every year, you should factor in travel expenses to and from the property.
- Utilities: You’ll need to pay for utilities, even when you’re not there.
- Insurance: You should protect the property from damage, especially when you’ll be away from it for most of the year.
- Mortgage: Any mortgage you take on your second home should be factored into your overall costs. Your mortgage costs would include a down payment and possibly mortgage insurance.
- Property taxes: You’ll have to pay property taxes on the home, regardless of how much time you spend at the property.
Bottom Line
Relaxed rules by lenders in recent years make it possible to receive the benefits of buying a second home while offsetting some of the monthly costs through rental income. You can rent out your second home as long as you live in it for the greater of 14 days per year or 10% of the time you rent it out.
All of the other second home rules still apply when getting a loan, such as being over 50 miles from your primary residence and that it’s suitable for year-round use. However, buyers can now take advantage of lower down payments and better rates when buying.
Tips for Renting Out Your Second Home
- Navigating the process of buying any home, especially a second one, is no small feat. A financial advisor can help you put a financial plan into action. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started today.
- If you’re ready to move forward with buying a second home, the best thing you can do is prepare. You can get ahead of the process by learning about the buying process and understanding how to go about getting a mortgage on your second home. Read SmartAsset’s guide on how to buy a second home to learn more.
- Want to get some insights into the mortgage rate environment? Use SmartAsset’s mortgage comparison tool as your starting point.
Photo credit: iStock.com/andresr, iStock.com/Inside Creative House, iStock.com/Dean Mitchell