Townhouses are gradually gaining popularity and are representing a growing share in the real estate market. They are a great option for many new homebuyers who are looking for something between single-family homes and condominiums. However, whether or not these types of investment properties are profitable is debatable among real estate investors. There are some potential expenses as well as limitations that you should educate yourself about before deciding to buy a townhouse. So are townhomes a good investment? Let’s take a further look.
Townhouse, condo and single-family homes: What’s the difference?
Many real estate investors confuse a townhouse with a detached single-family unit or a condo. Before anything, investors need to understand what the characteristics of each type of investment property are.
- Condominiums: A condo is a building or a group of buildings in which units are owned by individuals, rather than by a landlord. Owners of a condo unit only own the interior. All other areas including the exterior, the lawn, and communal areas are under the control of the Homeowners Association (HOA). Condos vary in style and depending on the style, the condo could be private, individual homes or apartment-style units.
- Single-family homes: A single-family home is a detached home that has open space on all four sides and is not attached to any other buildings. It is separated from other structures with walls that are extended from the ground to the roof.
Related: Invest in Condos or Single-Family Homes?
- Townhouses: Now a townhome is generally defined as a conjoined unit that is owned by individual tenants. Their architectural structure is similar to row houses meaning that owners usually share at least one or more walls. So owners of townhouses have neighbors on either side of them but never above them.
The characteristics of a townhouse seem to join between both condos and single-family homes. That’s why it’s important to clearly define what each type of property is before investing in them.
Are townhomes a good investment? Here’s what you need to consider
1. Financing
Financing an investment property is a big concern for many investors regardless of the type of property they choose to invest in. Some investment properties have easier financing methods than others. Trying to finance townhouses, for example, is much more difficult than financing a single-family home. Why? That is because many lenders treat townhouses like condos and are stricter towards them and usually require a more expensive mortgage.
Related: Financing Investment Properties: Buying a House in Cash vs. Mortgage
Are townhomes a good investment choice? Yes for real estate investors who are able to find the right lenders. Look for a lender who is experienced in financing townhomes and consult with previous real estate investors who are familiar with investing in these types of residential properties.
Also, take into consideration the townhouse complex before going to a lender. Many lenders have restrictions on how many renters are in the townhouses compared to owner-occupiers. If there are fewer owner-occupied townhouses in the complex, lenders may refuse to finance.
2. HOA Fees
Like I mentioned previously, anything other than the interior of the townhouse unit is the property of the Homeowners Association. This means that there is an HOA fee that must be paid by the townhouse owner. The HOA takes care of the exterior maintenance of the property, the landscaping, trash picking and so much more. So before deciding whether or not townhomes are a good investment choice, real estate investors need to calculate these fees into their budget. This will help investors to determine if investing in a townhouse is worthwhile and if they will get a high return on investment and cash on cash return.
Look for townhouses that have low HOA fees. But before you begin your search, you need to understand if the HOA for townhomes has restrictions on the number of renters in each complex. So you need to do your homework beforehand to make sure you’re not breaking any rules.
Additionally, real estate investors need to take into consideration the fixed HOA fees that come with owning a townhouse. These fixed HOA fees are subject to change, meaning that if an HOA needs extra cash for certain duties, they can decide to increase the fees. Keep this in mind when weighing future expenses for your property.
3. Appreciation
Appreciation is a very important factor for every real estate investment property. Property investors chase the investments that appreciate over time and increase in value so that when the time comes to sell, they will make a profit. Unlike single-family homes, townhouses don’t appreciate as much. They tend to appreciate much more slowly than other properties. This is mainly because they don’t have as much land as single-family homes.
Read Also: How to Calculate Real Estate Appreciation
So if your investment strategy is to buy and hold a townhouse property for appreciation, then you can be sure that the answer to “are townhomes a good investment choice” is definitely a NO.
If you’re still wondering “are townhomes a good investment choice,” then you need to weigh the good and the bad for these types of properties. Here are the pros and cons of townhomes:
Pros:
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Maintenance
If you’re a real estate investor who hates getting hands-on with your property, then investing in townhomes is a good option for you. Maintenance is taken care of for you by the HOA. This is great for investors who do not have time to manage their property.
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Rules and regulations
Most townhouse complexes have rules and regulations designed to keep everyone in line and ensure respect between neighbors. This is great because if an issue occurs between neighbors, you can resolve the issue without getting personally involved by reporting it to a board.
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Affordability
The prices of townhomes are much more affordable and cheaper when compared to other properties like single-family homes. Investors who are eager to own a home but don’t have the money to afford a detached single-family home need to stop wondering are townhomes a good investment choice because the answer is YES.
Cons:
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Monthly fees
Even though you save a lot of energy not managing your investment property and maintaining it, you still have to pay monthly fees. These monthly fees can make the low prices of townhouses seem less attractive.
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Short on space
Tenants are often looking for larger spaces, especially when they have multiple cars and such. Townhomes are not very roomy. However, as long as you market your rental property to the right type of tenant, this may not be a big issue.
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Privacy matters
Many people complain about townhouses because of the privacy issues they face. Unless your space is an end unit, then your tenants are going to have people living on both sides of the unit. Again, this may limit the tenant pool somewhat as not everyone is okay with the limited privacy of living in townhomes.
The bottom line
Are townhomes a good investment choice? This is a very debatable question because many investors are with and many are against. Despite what your opinion is on townhomes, you need to weigh the good and the bad for any type of investment before making any decisions. To help you make smart investment decisions and learn more about townhomes, visit Mashvisor’s knowledge center for more blogs on this topic.
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