The Major Differences Between an Investment Property and a Second Home

There are many types of property that people can buy. Two common terms that are often used when referring to properties are “investment property” and “second home”. But what exactly is the difference between these two types of properties?

An investment property is a property that is purchased with the intention of earning a return on the investment, either through rental income, capital gains or both. A second home, on the other hand, is a property that is not your primary residence but may be used as a holiday home or for other purposes.

The main difference between an investment property and a second home then boils down to intent. An investment property must make financial sense – it should generate positive cash flow or have the potential for capital appreciation.

A second home does not necessarily need to make financial sense, and you will be spending money on it without it generating any sort of income.

What is an investment property?

An investment property is one that is purchased with the intention of earning a return on the investment, either through rent, future resale value or both.

An investor may choose to purchase an existing property or build a new one. Investment properties are typically more expensive than regular homes, as they are often located in desirable areas and/or come with high-end finishes and features.

There is little emotional attachment to an investment property. You don’t purchase it to live in yourself; instead you buy it, renovate it and then either rent it out to others or put it back up for sale.

What is a second home?

Second homes are residences that you own and occupy part-time, typically in addition to a primary residence. Many people purchase second homes as holiday properties, but they may also be purchased for work reasons (e.g. if your job requires you to be based in different places), or as a place to retire.

As they are literally a ‘home away from home’ there is a lot more emotional attachment to them.  You’ll likely invest more time and money renovating and decorating a second home as it’ll be somewhere you personally live in for parts of the year.

A second home is often located somewhere desirable to the owner, instead of somewhere close to schools it might be near a beach.  Instead of being in a jobs rich city it might be located in the countryside.

Because second homes are considered personal property, they come with different tax implications than Investment property.

What are the major differences between an investment property and a second home?

There are a few key differences between investment properties and second homes. The most significant difference is that an investment property is purchased with the intention of generating income, while a second home is usually bought for personal use.

An investment property has the potential to earn you additional income through rental or resale, which carries tax implications. A second home does not have this earning potential.

A mortgage for a second home will usually require you to have a minimum of two months of cash reserves on hand. This is because second homes are considered more risky by lenders than primary residences.

A mortgage for an investment property will often carry a higher mortgage interest rate than a loan for a second home. This is because investment properties are considered more risky by lenders than primary residences or second homes.

What are the benefits of an investment property?

An investment property is a property that you purchase with the intention of earning a return on your investment, either through rental income, the future resale of the property, or both.

The biggest benefit of an investment property is that it can provide you with a steady stream of passive income. Passive income is money that you earn without having to work for it.

Another benefit of an investment property is that you can borrow against the available equity to free up cash for other investments or expenses.

Lastly, if you no longer want to keep the property as an investment, you can sell it or convert it into a second home.

What are the benefits of a second home?

With no money coming in from a second home you might wonder why people have them.

100% availability – Owning a second home can be more affordable and convenient than booking hotel rooms or renting a second home. You’ll have a place to stay whenever you want without having to worry about availability or cost.

A future investment – the housing market may fluctuate, but property usually appreciates in value. By buying a second home now, you’re investing in your future and building equity that you can tap into later in life.

To prepare for retirement – you can buy a second home now and make it your primary residence when you retire. This way, you’ll have a paid-off property that can serve as your retirement nest egg.

To escape the city – purchasing a second home outside the city can help you build equity more affordably while giving you a place to escape the hustle and bustle of city life. This is especially beneficial if you live in an expensive city where property purchasing is out of reach for many people.

Of course, if you find yourself using the property less and less, you could consider using it as a rental property instead of a second home.  Just be mindful of your mortgage terms; if you have a residential mortgage it may not allow you to use the property as a source of income. You should always check with your lender.

What are the tax implications of a 2nd property?

Regardless of the eventual use, when purchasing a second property you’ll need to pay Stamp Duty Land Tax.

The amount will depend on where you are in the UK and how much the property is purchased for.

England and Northern Ireland

Purchase PriceTax AmountTax + Surcharge
Up to £125,0000%3%
£125,001 to £250,0002%5%
£250,001 to £925,0005%8%
£925,001 to £1.5 million10%13%
Above £1.5 million12%15%

Where you are purchasing your main home you just pay the tax amount.  Where you are purchasing a second property, you pay the tax amount plus a surcharge of 3% on top of these rates.

Wales

The Welsh version is called Land Transaction Tax (LTT) and it operates in the same way as England but with a 4% surcharge on each band.

Purchase PriceTax AmountTax + Surcharge
£0 to £180,0000%4%
£180,001 to £250,0003.5%7.5%
£250,001 to £400,0005%9%
£400,001 to £750,0007.5%11.5%
£750,001 to £1.5 million10%14%
£1.5 million and above12%16%

Scotland

If you’re buying in Scotland you’ll be paying Land and Building Transaction Tax (LBTT) which has its own bandings:

Purchase PriceTax Amount
Up to £145,0000%
£145,001 to £250,0002%
£250,001 to £325,0005%
£325,001 to £750,00010%
Above £750,00112%

Scotland adds an ‘Additional Dwelling Supplement’ of 4% on the total value of the property if it’s not your first home. 

For example, if you purchased a property for £150,000 you’d pay 0% on the first £145,000, 2% on the remaining £5, and 4% on the total £150,000.

Ongoing Charges

Once you’ve purchased another property, you’ll also be taking on additional ongoing charges.  In addition to mortgage payments you need to keep in mind, that there will be council tax to pay.

If you don’t live in the 2nd property all year round, you might be eligible for a discount, check with the local council.

If you are using the property as a buy-to-let you need to pay Income Tax on any money made via rent.

Depending on the setup, you can reduce your tax bill by claiming expenses and turning a holiday home into a furnished holiday let.

I’d strongly suggest speaking to a tax expert about your options, as they will know the most cost-effective way to deal with multiple properties.

Final Thoughts

Buying a second property is a great idea, but it comes at a price. You’ll need to factor in the costs associated with owning two homes, such as maintenance fees, taxes, and insurance.

It’s important to weigh up whether this purchase makes sense before making a decision. If you do decide to go ahead, I hope this article helps you understand enough about buying a second home or investment property to help with your decision.

Written by Mark Draper

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