Investing in real estate with a second home or vacation property is an excellent way to build wealth. That's because unlike automobiles or mobile homes, they appreciate over time. It's easy to confuse the terms "second home," "vacation property," and "investment property." While they appear similar, there are some important differences between them. But it's extremely important to know the differences if you are going to apply for financing through a loan. The interest rates and Federal tax laws aren't the same. Whether knowingly or not, it's a mistake that can get you charged with mortgage fraud, a Federal crime. Read on and learn the differences to avoid risks and expenses.

Second Homes and Investment Property

Suppose you invest in a mountain cabin, ski chalet, or beach house at your favorite getaway destination. It's a few hours away and you go there often. This makes perfect financial sense because you'll save money on expensive hotels and vacation rentals over time. You can rent it out a few times a year using a hosting service such as Airbnb, but if it's primarily for your own use, it's still considered a second home.

An investment property is purchased with the intent of generating income through short or long-term rentals. It may be right next door or 1,000 miles away from your primary residence. There is no difference. You're a landlord with renters paying you to live in it. The home has no emotions tied to it. It's simply a "cash cow" that generates income except you're responsible for the upkeep. Before making an investment of this type, it's wise to consider neighborhood amenities such as highly-rated schools and low crime rates to attract good tenants.

Financing a Second Home or Investment Property

There are key differences in financing a second home, investment property, and primary residence. Expect the interest to be higher for an investment property and second home than a primary residence. Lenders consider these investments as riskier than a primary home. They know that should you face financial difficulties down the road, you're more likely to continue paying the mortgage on your main home.

It may also be harder to qualify for a second home or investment property. Lenders will more closely scrutinize your overall financial picture. And they may require a larger downpayment so they have a cushion to fall back on should you default.

If you're purchasing a property for rental income, the lender may require an appraisal on the property that considers comparable rents in the neighborhood. As for second or vacation homes, lenders may require it to be 100 miles or less from your primary home.

Differences in Tax Rules

You'll need to be aware of the differences in federal income tax rules between second homes and investment properties. The taxes for your second, or vacation home will be the same as for your primary residence. Up to a given limit, you can deduct interest paid on the mortgage.

With an investment property, you can deduct the interest as well as claiming expenses for operating a rental business. However, you must report the income you get from rentals.

The bottom line is, never try to use the terms second home, vacation home, or investment property interchangeably when obtaining financing to avoid getting into trouble for mortgage fraud. When you're ready to invest in any property, consider homes for sale in Sherburne County.