How do you guys straddle the definition of investment property and second home?

Question

I am about to purchase a home in a popular vacation area. My family will get several weekends of usage out of it, but most of the time it will be used as a rental.

Mortgages on second homes are a full two points better than an investment property. The mortgage rules say (as I understand) that in order for a home to qualify as a second home, the owner needs to occupy it for more than 14 days. Any fewer and it is an investment and not a second home.

The IRS rules for being an investment property (and unlocking most of the tax advantages) are that the owner cannot stay in the home for more than 14 days. So the mortgage companies and the IRS set the exact same threshold for being a second home or being a an investment property.

My CPA however has advised me that there are caveats for doing repairs, or periodically visiting to inspect it, that allow you to exceed the 14 day leisure limit. So I could satisfy the mortgage company that it is a second home for the superior rates by exceeding 14 days, while still satisfying the IRS that it is an investment property.

Are you guys getting investment loans or second home loans for your AirBNBs?

Robin Simon · Answer

Its certainly a grey area - heres a twitter thread from a real estate lawyer on this topic that I have found helpful. Although if you are investing for at least a decent time frame (~5 years) then having a prepayment penalty on a DSCR Loan for the property is going to be very competitive rate and terms wise with a 2nd home loan anyway - I would say the "full two points" is a little exagerrated

https://x.com/Wildlaw406/status/1689395078589276160

Dave Skow · Answer

@Kyle Mitchell- pricing for a 2nd home ( vacation home )  is  virtually the same as  pricing for a rental proeprty these days . Make sure you obtain a full loan pre approval and get  clarification from the lender you use ...Also - If  renting the property - the loan you need to use is a rental property loan

Jay Hurst · Answer

https://singlefamily.fanniemae.com/media/9391/display

Matt Devincenzo · Answer

I'd purchase a second home and fulfill the loan requirement for stays etc. If the tax deduction for investment was limited that first year because of the amount I stayed then that's just what it is. In year two on I'd make sure I didn't stay more than the 14 days to maximize my tax benefit.

Account Closed · Answer

under the right circumstances, you maybe able to get the loan, then place the property in service shortly after and get the best of both worlds. (better loan + its an investment property). The bank is unlikely to even know or care (this is not financial advice :P)

Nick Belsky · Answer

@Kyle Mitchell

A second home and investment price out pretty much the same.  Whomever is telling that it is drastically different is not in touch with anything outside of their bubble.  The only material difference is the down payment requirements and prepayment penalties that come with DSCR loans.  Most any client I work with who intends to stay in the home uses a an investment loan as it is far less UW and less resistance.  I am not sure what "tax advantages" you would be referring to... they are virtually taxed the same.  Insurance will be higher for either as well.

Get plenty of second opinions and other lenders/brokers to give you pricing options.  Whomever is advising you now is only one opinion, and frankly, in not giving you the full picture of what's out there currently.

Cheers!

Caleb Kim · Answer

This is an interesting question. I was looking at various financing options for my resort home, which is also used as an Airbnb rental. I think it's important to thoroughly research all aspects of your mortgage and tax laws to ensure you're making the right choice. I would probably consult a professional to evaluate all the opportunities and risks associated with each financing option.

Andrew Postell · Answer

@Kyle Mitchell yeah, I'm not sure who is telling you that there is a difference between second homes and investment properties...are you talking to someone who is doing a "non-QM" loan or a "portfolio'd" style loan?  As mentioned above, Fannie/Freddie do not have any pricing difference.

Most DSCR lenders also don't have any pricing difference.  This might be a case of speaking with some different lenders but the only difference on the DSCR side of things is that the Air DNA method to calculate potential rent will have a slightly higher interest rate.  Certainly NOT 2 points though.  Keep in mind there are 8,000 different lenders in the US...so, obviously we cannot speak for all of them...but the absolute best of the best lenders in this space, that have the most aggressive pricing, won't penalize you with 2 points for one option over the other.

I would also question that IRS definition - that is not the case.  Even on your own primary home, you can claim tax advantages if you are using it for business purposes.  Maybe the "classification" isn't the important piece - but can I write off expenses if I occupy a property more than 14 days? Yes, you can.  100% you can.  With Fannie/Freddie they do NOT define a "second" home with how many days you occupy it.  The definition with them is completely different and has nothing to do with the amount of days you stay there.

I hope I'm not coming down too hard here but sometimes the tone of typing out a response is hard to convey.  I'm just trying to help (and so are the others above).  There are tons of people who get investment property loans for their STR/MTR properties with no issue.

Hope all of that makes sense.

How do you guys straddle the definition of investment property and second home?

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