2nd home or investment property?

Question

Hi everyone. I am just starting out with my 1st rental property in Hawaii but am wondering which one is more beneficial: 2nd home that's a house hack vs. investment property. Per the lender I'm using right now, she said I can pre-qualify for more purchase price power with an investment property mortgage than a 2nd home mortgage. I would put 10% down with the 2nd home vs. 20% with the investment property, but would have to use a HELOC to fund the extra 10% down payment, increasing my DTI. She also mentioned that Freddie/Fannie is changing things for 2nd homes, so it might be more beneficial to do an investment loan. What are the pros and cons to each mortgage, as well as the tax advantages/disadvantages for both? Any other information would be greatly appreciated!! Thank you!

Axel Meierhoefer · Answer

@Brian Plajer There are specific rules for second homes that are similar to first home owner-occupied. Yes, you can get those with as low as 10% down and good rates but you have to be quick as the federal government has changed the G-fee rules starting April 1st. If you can't close before that the loan would get much more expensive o interest rates. Here is a good article about it:

https://www.floridarealtors.or...

Loren Clive · Answer

in my experience, second home mortgage rates are lower than investment properties. but if you're buying a home in Hawaii on the same island where you live, often lenders will not qualify it as a second home.

tax implications would be something to discuss with your accountant

Krystl Matsunaga · Answer

Hi everyone. Thank you so much for your responses. Here is a little more information/background. I live on Oahu with my husband and will be moving to Kona (another island) for school. We own a home here and have a mortgage on it, and my husband will live in our current home while I go to school. We are planning on buying a place for me to stay while in school (again on another island), and hopefully rent out some rooms to some of my classmates to help with the mortgage (house hack). Our income will reduce in half as I will not be able to work for 2 years, but my husband will continue to work. We are able to qualify for $800k as owner-occupied or 2nd home, but won't be able to make it to $900k unless it is an investment property. I was asking to see (if we buy below $800k), what would be more beneficial in all aspects, owner-occupied vs. 2nd home vs. investment property? But if we buy a property above $800k, our DTI will require us to only purchase it as an investment property. Also, with more than $800k, we would have to pull from our HELOC in order to fund the down payment. I understand that doesn't make sense for more debt, but if it makes out in tax advantages or other reasons, then it would make sense. Hopefully this gives you a bigger picture of my situation. Thank you.

Axel Meierhoefer · Answer

@Krystl Matsunaga Several people here already stated that more details would help give better feedback. One of the big things to answer your question has to do with the goal or purpose of the purchase.

Let's assume you could have a second home in Hawaii even if you already live there (maybe each island could count separately), you would still want to determine what you will use it for. To stay within the rules, you would be limited to short-term rental use so you could maintain the claim that it is a second home. If generating cash flow from short-term rental income is your goal you would be better off doing that but keep in mind rules change on April 1st, 2022 (see the article I posted above) and make second home financing much more expensive on a monthly cost basis.

If your goal is to develop a passive portfolio that benefits from rental income and appreciation and does not require a lot of your time, you might be better off with an investment property. Be aware that the investment property could be acquired turnkey and would not have to be in Hawaii, which could mean your 20% downpayment, let's say in Ohio, is equal to a 10% downpayment of a vacation home in Hawaii. You would have to run the numbers but avoid the HELOC use (not recommended when you are just starting out).

Making sure you have identified what the goals are and then find the best performing approach to meet your goals has proven to be a path to success. In my mentoring, I use the approach shown in the image below to test/check goals for viability and completeness.

Brian Plajer · Answer

Can't you purchase it as a vacation home and put down 10%?

Isi Nau · Answer

Hi @Krystl Matsunaga

A house hack will always have better tax implications and financing terms than a rental.  Hands down.

You mentioned a second home mortgage and investment property mortgage.  I believe you'll need an owner occupant loan in order to house hack.  That's a good thing.  The terms will be much better.

As far as which investment route is better, more details would be needed.  For example what will you do with your current home (rent it out or sell it)?  The financials of the house hack?  The financials of the rental?  What is the next step after this initial move?  A fair amount of due diligence should be given to find the best route.

Using a HELOC to purchase a rental often leads to little/no cash flow, and also increases risk because the property is technically 90-100% financed.  There should be a plan for getting those HELOC funds out of the rental property as soon as possible, which most often happens through a refinance.  If that is the plan, then it will be even more critical to select the right property.

Aloha!  Isi

Joshua Janus · Answer

I would advise purchasing an investment property in a great market. In order to do this successfully, check out multiple US markets and see which one(s) tailor towards your goals and dive in. Then find an investor friendly realtor. You really want someone that invests in their market themselves and understands the numbers. They should be able to determine the COC, annualized return, estimated ARV of a BRRRR, accurate rent comps and more. The valuation and market value of a multi family property differs from a single family and you want someone that understands the distinctions if you go that route. If they just represent first time single family home buyers and aren’t constantly finding off market properties and reviewing deals, you’ll find a better investment through someone else.

2nd home or investment property?

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