Often, the intentions of buyers in the Ocean City, MD real estate market are to own a getaway place at the beach or to generate rental income. Many buyers are unfamiliar with the difference between buying a property as a second home or as an investment property. In fact, depending on your purchasing strategy, it could affect you financially.
In this article, I’ll breakdown the differences between buying a second home verse an investment property in Ocean City, MD. Even if you’re considering options in other markets, this could help you too!
Whether you're looking to buy an oceanfront property or relax by the bay, second homes and investment properties in Ocean City, MD are a great investment to enjoy the coastal lifestyle.
Financing a Second Home or Investment Property
A second home is a property you’ll use for personal use without generating income. Many buyers consider buying a second home and renting the property to help subsidize their property expenses. If you’re considering financing your purchase, a second home loan can offer lower interest rates and lower down payments.
In Ocean City, MD, it’s more than possible to buy a second home with a 10% down payment. There are some buildings in town that lenders will require a higher down payment. If you’re buying an investment property, you may need a 20%-25% down payment. This can affect some buyer’s ability to buy a place at the beach.
Start with a second home. Later buy an investment property
You may find buying your first property as a second home may have some advantages for two primary reasons:
- 10% down payments
- Lower interest rates
Buying your first property in Ocean City, MD as a second home doesn’t prohibit you from later renting it.
If you later decide to buy another property in Ocean City, MD, you could buy the next property as an investment property, or potentially turn your existing second home into an investment property.
There’s two ways this would work:
1. If after the purchase of your second home, you rented the property and can verify rental income on your schedule C of your tax returns or you have a rental company management agreement, then you could possibly purchase your next property in Ocean City as your new second home.
2. You could list your current second home for sale, and purchase the new property as your new second home. You may be able to buy the new second home before selling your existing second home.
You’ll need to prove to the lender that you’re upgrading your current home for a home that better fits your situation. For example, going from no water views to a home with water views; or going from a one bedroom to a two bedroom.
These scenarios pertain to buying with a mortgage not a cash transaction. There are a few conditions that you’ll need to meet and an experienced Ocean City, MD Realtor® can explain your options.
Buying investment properties using 1031 like kind exchanges
1031 like kind exchanges are common in Ocean City. You can learn more about this type of transaction in my blog article “What’s a 1031 Like Kind Exchange in Real Estate?
In short, you may be able to defer capital gains from the sale of your investment property by taking the proceeds from the sale and purchasing a new investment property.
You’ll need to discuss with your accountant or financial adviser the best way to start your purchase whether as a second home or an investment property.
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