Purchasing a second home, in addition to your primary residence, is often the pinnacle of residential property ownership. Whether the purchase is for personal or financial reasons, it signals a transition toward building a portfolio of real property — investments that help you create long-term and even generational wealth.
Even if it's a one-off purchase, second home ownership provides personal and financial flexibility — a tactic that a growing number of Canadians are employing to secure their future economic well-being.
However, unique circumstances distinguish one type of second home purchase from another. Let's look at the differences between buying a second home and an investment property, including factors to consider before committing to a purchase.
Two sets of priorities
The terms “second home” and “investment property” can often confuse buyers looking to acquire property beyond their primary residence. Much of that stems from the terminology used interchangeably, even among seasoned second-home buyers who know the distinction. After all, the core of both property transactions is that each is an investment.
However, your priorities for the second property you buy and how you plan to use it immediately separate the residential transactions into two distinct categories. It dictates how you finance and purchase the home, manage and maintain it, and pay taxes on it.
What is a second home?
A second home is precisely as the name suggests: a home that is primarily utilized and occupied by you for a portion of the year. Also referred to as a vacation home, almost any property type qualifies as a second home — a coastal cottage, mountain cabin, downtown condo, or multi-unit building.
You can rent out your second home throughout the year, with it still being considered a second property as long as you occupy the house for at least 10% of the days you rent the property (or at least 14 days per year).
What is an investment property?
An investment property is the exact opposite. In this scenario, the property purchase stems from a need to generate income through short- or long-term renting as a non-owner-occupied property. Similar to the above, an investment property can be any property type, whether it’s a condo, cottage, or multi-unit building of up to four units (anything more is considered commercial).
Buying a second home vs. an investment property
The most significant difference between a second home and an investment property is how it's purchased. However, the first few steps of the process will prove familiar and resemble the purchase of your primary residence:
- Pass Canada's mortgage “stress test”
- Have a verifiable source of income
- Possess excellent credit (anything north of 660 is considered good; 725 and above most often secures the best rates)
- Meet the requirements of the lender's specific debt-service ratio
When securing financing for a secondary property, the first significant difference between a second home and an investment property is the requirements for the down payment.
For second homes — those that will meet or exceed owner-occupancy standards for the year — the conditions for the down payment are similar to your primary residence, including:
- Minimum of 5% down payment for a property value at or below $500,000
- Down payment between 5% and 10% for a property value between $500,000 and $1 million (5% of the first $500,000 plus 10% of the amount above $500,000)
- 20% down payment for a property value of $1 million or more
If your down payment falls under the 20% threshold, you will be required to purchase mortgage insurance.
Investment properties, on the other hand, will require a full 20% down payment regardless of the home's purchase value. While it's a higher upfront cost, you eliminate the need for mortgage insurance, which can result in considerable savings over time.
In addition, many lenders will allow you to submit between 50% and 100% of your future potential rental income when qualifying for an investment property mortgage. In some circumstances, this makes the threshold for mortgage qualification considerably easier to clear than that of a second home purchase.
Benefits and drawbacks of buying a second home or investment property
Each has advantages and disadvantages beyond the initial purchase. Foremost, when considering your options for either purchase, determine your financial health and the primary reason you want to expand your residential ownership.
Although a second home will provide many years of personal enjoyment, you are essentially doubling the homeownership expenses you are responsible for. Similarly, the right investment property results in a financial windfall over many years, but it also comes with the burden of being a landlord. Before committing to either endeavor, it helps to understand the benefits and drawbacks of each.
Benefits of second home ownership
- You’ll enjoy a permanent home in a favorite city, town, or vacation destination that is yours to return to again and again any time of the year.
- There's a lower threshold to ownership, with a downpayment of as little as 5%.
- The home can be rented for ancillary income when not in use.
Drawbacks of second home ownership
- Owning a second home means owning a second set of expenses, including a second mortgage, additional taxes and fees, and ongoing maintenance and upkeep.
- A lower down payment will require mortgage insurance.
- To maintain second home status, you must commit to living in the home for a set number of days every year.
Benefits of investment property ownership
- You’ll receive a consistent, monthly source of income.
- Mortgage qualifications are easier to meet, with potential rental income a viable part of the approval process.
- You’ll be eligible for several annual tax deductions
Drawbacks of investment property ownership
- As a landlord, you are responsible for owning, maintaining, marketing, and leasing the investment property in service of your ROI.
- A full 20% down payment is required to acquire the property.
- All rental income is subject to taxes.
A trusted partner to help guide your search
When acquiring a second home or investment property, you want to ensure a seasoned and knowledgeable real estate professional guides your search. If you're ready to expand your portfolio, contact Cohen Homes & Estates to begin your property search and find the perfect fit. Barry and his team's vast experience and unrivaled expertise will serve as your guide to the Toronto luxury real estate market and beyond as you embark on your next incredible journey.
*Header photo courtesy of Cohen Homes & Estates
