Thinking of buying a townhouse for investment? There are several things you need to know before making a decision.
But first things first: What exactly is a townhome? Also referred to as a row home, a townhome is a multi-story house that shares at least one wall with an adjacent home. When you buy a townhouse, you own the home as well as the land the home is sitting on, both the front and back yards. Townhome complexes also have common spaces that are shared between all the properties in the complex.
Before we look at the buying a townhouse checklist, it is important to understand the pros and cons of such a real estate investment strategy.
Benefits of buying a townhouse investment
- Better affordability – It is usually less expensive to build homes that are attached. As a result, row homes are often less expensive compared to single family homes in the same neighborhood.
- More ownership – When you buy a townhouse, you own both the exterior and interior of the property. This is unlike buying an apartment or a condo where you only own the unit itself.
- Less maintenance – Since townhomes are located on small lots, maintenance of the exterior and interior is relatively easy. At times, the homeowners association handles the maintenance of the exterior of your home as well as shared spaces.
- Access to extra amenities – Your tenants will have access to shared amenities like a spa, swimming pool, fitness center, gym, or clubhouse. This means that you can ask for a higher rental rate than other income properties in the area.
- Strategic locations – Quite often, townhomes are located near major school zones and traffic routes. This makes them appealing to potential tenants, which lowers your vacancy rate as a landlord.
Downsides of buying a townhouse rental property
- Potential lack of privacy – Since townhouses are attached units, they don’t allow much privacy. For example, having noisy neighbors could end up driving your tenants away.
- High HOA fees – Owners of townhouses are required to pay monthly HOA fees that cover the maintenance of common areas like lawns, pools, and sidewalks. While this can be convenient and reduce the rental property management work, the fee is usually very high and could even be increased over time.
- Strict HOA rules – The HOA has rules and regulations that determine how you can use your rental. For example, you might not be allowed to rent it out on Airbnb. Or residents might not be allowed to keep pets. Such restrictions can be very frustrating and could keep potential tenants away
What to look for when buying a townhouse
The importance of location in real estate investing cannot be overemphasized. Therefore, the first first thing you need to do when buying a townhouse is to carry out a neighborhood analysis. Traditionally, the process of conducting a neighborhood analysis is a very lengthy and time-consuming task. Thankfully, Mashvisor’s real estate heatmap tool makes this process much easier and less tedious. Using reliable property data and predictive analytics, our real estate heatmap will show you the performance of different markets within the same city using a range of colors (red, orange, yellow, and green). Red represents neighborhoods with high-performance rates, while red represents those with low rates. You can narrow down your search using the following metrics:
- Listing price
- Traditional rental income
- Airbnb rental income
- Traditional cash on cash return
- Airbnb cash on cash return
- Airbnb occupancy rate
Another feature you can access through the real estate heatmap is the neighborhood analytics page. This tool will provide you with additional data on the area including:
- Number of properties for sale
- Walk score
- A rent analysis (historical traditional and Airbnb rental income)
- Rental comps
- Historical Airbnb occupancy rate
- Optimal rental strategy (traditional or Airbnb)
- Optimal property type
Such thorough neighborhood analysis will enhance your chances of success in real estate investing.
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2. Rental demand
Rental demand refers to the number of individuals that are looking for rentals in a neighborhood. When you buy a townhouse in an area with high rental demand, you will experience lower vacancy rates and a steady cash flow. You can determine the rental demand of an area by looking at the demographics, the economy, job market trends, and future development projects. The number of rental listings in an area is also a good indicator of the level of demand for traditional rental properties. If the housing market is flooded with rentals, it shows that there is a lot of competition for tenants.
3. Expected return on investment
You need to figure out if a townhouse is profitable before making a buying decision. The best way to analyze the investment potential of an income property is to use Mashvisor’s rental property calculator. This tool uses the latest real estate data and trends for its investment property analysis. All you need to do is to input the address of the townhome that you are considering buying if it’s not already listed on Mashvisor. The tool will then generate the return on investment in terms of cash flow, cash on cash return, and cap rate, based on the historical and current performance of rental comps in the area.
4. HOA rules and regulations
Before buying a townhouse, get familiar with the homeowner’s association. Common HOA rules include architectural controls, home occupancy limits, holiday decoration restrictions, noise compliant policies, home maintenance standards, short-term rental restrictions, and parking guidelines. Failure to adhere to such rules could result in fines, warnings, and more. While strict guidelines are often useful for protecting home values and preserving the area’s aesthetics, they can also be very restrictive. Be sure to look at the HOAs governing document to ensure that it is compatible with your chosen rental strategy before signing on the dotted line.
5. HOA fees
As mentioned earlier, HOA fees cover costs of maintaining common areas such as the elevators, patios, swimming pools, landscaping, and lobbies. They also cover costs like city services (water and sewage, trash removal, etc), insurance, pest control, and reserve funds. The HOA fees will vary widely depending on the type of home, its location, and the amenities offered. In some cases, it can be as high as $700 per month. Before buying a townhouse, find out what monthly HOA fees you are required to pay and include it in your rental property analysis to make sure that you will end up with positive cash flow and good cash on cash return. Moreover, remember that you might occasionally be required to pay an additional special assessment for emergency repairs.
While buying a townhouse on your own is possible, it would be advisable to work with a real estate agent. An experienced agent specializing in investment properties will show you the best townhouses for sale in the area, negotiate on your behalf, and help you with the paperwork. Furthermore, don’t forget to use the Mashvisor real estate investment tools to find and find top-performing rental properties all across the US housing market.