Buying a townhouse to rent out could be a lucrative real estate investment, so it’s about time you learn how to do it to maximize profit.
Townhomes are one of the most popular property types that investors decide to buy and families choose to rent. They come with many important benefits over single-family homes, apartments, and condos, making them such a widely accepted choice across the US housing market. If you’re looking for a property to add to your investment portfolio in 2023, this could be an ideal option.
Table of Contents
- What Is a Townhouse?
- Are Townhomes a Good Investment?
- Can You Buy a Townhome as an Investment Property?
- How to Buy a Townhouse: 7 Tips
Buying a townhome follows many of the same principles as purchasing any other investment property type. Nevertheless, there are some differences to be on the lookout for that relate to the specifications of this kind of housing.
In this article, we will first help you answer the question, “Should I buy a townhouse to rent out?”. Afterward, we’ll provide you with seven surefire tips on purchasing this type of property to optimize your return on investment.
What Is a Townhouse?
A townhouse, also known as a townhome and similar to a rowhouse or a rowhome, is a multi-story house that shares one or more walls with neighboring houses. Typically, they have narrow floor plans and compensate in square footage by having two or more floors. It makes enough for an entire family to live comfortably.
The exterior design of each attached unit might be different from the design of the neighboring attached structure. That’s the main difference between a townhouse and a rowhome, with the latter being the same throughout the whole row.
In most cases, a row of townhouses runs the entire length of the street, with each home having its own independent entrance. Townhomes are the perfect housing option for you if you would like to have privacy and security through your own door to the street but don’t mind sharing walls with your neighbors.
Townhouses are most commonly found in the suburbs or urban areas, where they can be built up to the zero-lot line. It makes them a good choice for investors who’d like to purchase a rental property for sale in a city market.
Townhomes are commonly mistaken for condominium units because of the idea of sharing walls with neighbors and belonging to a homeowners association (HOA). However, there are some important differences between the two.
Most significantly, when buying a townhome, you purchase all the floors, so you get your own entrance and have neighbors only on one or two sides. Meanwhile, when you buy a condo, you use a common entrance and have neighbors under, above, or both.
Townhouse vs Single-Family Home
Townhomes resemble single-family properties the most, but there are major dissimilarities between them.
The common aspect of these two property types is that you own an entire housing unit with a few floors. It means you get your own entrance, benefiting from more privacy than apartments and condos. You can have a basement and a roof as well as a small garden.
In terms of differences, the most important one is that a single-family property does not share walls with any other structure. It is a standalone housing unit, so you have to be less considerate of neighbors. Also, many townhouses are governed by an HOA, which is a rare practice with single-family homes.
With a single-family home, you are free to implement whatever repairs and improvements you want on the exterior (as well as the interior). Consequently, you can make it fit your personal style and preferences. You can also force appreciation on it to rent it out at a higher rental rate or sell it for more in the future.
Are Townhomes a Good Investment??
To answer the question, “Is buying a townhouse a good investment in 2023?” we have to consider the advantages and disadvantages of investing in this type of property.
Just like purchasing any kind of property, townhome ownership comes with its pros and cons from a real estate investor’s point of view.
Pros of Buying a Townhouse
The most important benefits of investing in this property type include:
- Townhomes are affordable: Although they are fairly similar to single-family homes, buying a townhouse vs house that’s detached tends to be cheaper for a comparable property. It is because it costs less to build attached homes as you have to put in fewer exterior walls. That makes them an affordable option for first-time homebuyers and investors.
- They require little maintenance: As townhomes usually have less exterior space, such as a yard or patio, and fewer walls, it is much easier to keep up with exterior maintenance. Additionally, if your investment property comes with a townhouse community, like an HOA, you don’t have to do any exterior upkeep at all.
- Townhomes offer more ownership: When you buy a townhouse, you typically have ownership over the interior and exterior of your property, unlike with a condo. It means there is more freedom for designing the exterior of your home, such as the color of the paint on your house or how you decorate your yard. Just make sure you don’t go against the HOA rules.
- There is privacy: Opposite apartments and condos, townhouse owners and their tenants can enjoy a significant degree of privacy and independence. It is because the property has its own entrance.
- Townhomes can bring excellent ROI: As long as you invest carefully and conduct diligent rental property analysis, you can generate good monthly income and enjoy a strong return on investment. Fewer expenses are associated with maintaining a townhouse, so the cash flow can easily be positive.
Cons of Buying a Townhouse
Now that you know the main pros, let’s take a look at the reasons why you should never buy a townhouse:
- They are less private than detached homes: Townhomes share interior walls with the townhouse next door, which generally means less privacy. However, since you’re considering buying a townhome for investment purposes, this shouldn’t bother you much. Most renters will still prefer the extra independence compared to condos and apartments.
- Townhomes could be expensive per square foot: Even though townhouses may be more affordable than purchasing a detached home, they can be pricier per square foot.
- HOA rules: Similar to condominiums, most townhomes have a homeowners association (HOA), so you’d need to consider the HOA rules and pay monthly HOA fees for the upkeep of exterior spaces. This includes parking lots, sidewalk care, trash delivery services, and lawn care. It is both a pro and a con as it translates into less exterior maintenance work for townhouse owners.
- Rental restrictions: The HOA might have specific rules regulating rental activities within the townhomes in the row. Most frequently, running an Airbnb business from a townhouse might be prohibited by the HOA rules. So, before you dive into a purchase, make sure the HOA doesn’t prevent your preferred rental strategy.
So, considering both the advantages and disadvantages, is a townhouse a good investment?
The answer is that a townhome can be a very good real estate investment for investors looking for a more affordable opportunity in an urban or suburban market. Like with any other investment, the key is to perform rental market analysis and investment property research before purchasing. The extra layer is that you need to check out the HOA rules to make sure renting out is allowed and unrestricted.
Can You Buy a Townhome as an Investment Property?
In short: Yes, you can buy a townhouse as an investment.
As a hybrid between a single-family home and a condo, it brings many of the benefits of these two property types, which makes it an ideal choice for some rental property investors.
Townhomes are cost-friendly alternatives to single-family homes. They are more private than a condo, as you only have the walls on the sides of your home shared between other units rather than all four walls. You get your own private entrance into your property. They also come with more yard space and patio area than most condominium units.
From an investor’s perspective, townhomes usually enjoy solid rental demand as rental rates are more affordable. At the same time, they provide a rental space in busy areas where most families want to live. The lower rent is more than compensated for by the lower sales price, leading to a strong ROI.
Thus, buying a townhouse is a common real estate investment. Indeed, many real estate investors choose to purchase a whole street of townhouses and rent them to individuals or families as a way of generating rental income. They are quite easy to maintain, so you won’t have to invest too much money into maintenance.
How to Invest in a Townhome Rental Property
To make a profitable investment in a townhouse, you have to go through a few specific steps that relate to both the location and the property itself. The good news is that Mashvisor can support you in most of them.
1. Find a Market for Townhouses
First of all, you need to find a market that provides a good return on investment for this particular property type. The Mashvisor Market Finder allows you to search for the best markets with a few clicks of a button. All you have to do is to enter your criteria like preferred rental strategy, Mashmeter score, school ranking, property price, monthly rental income, and occupancy rate.
Immediately, you’ll get access to the top US markets – at the city and neighborhood level – for buying a townhome to rent out.
2. Search for Townhomes for Sale
Second, you should start searching for long term or short term rentals for sale, depending on your strategy. With the Mashvisor Property Finder, you can forget about the traditional, inefficient methods like driving for dollars, reading local newspapers, etc. You can use the power of AI and machine learning to find the most profitable townhouse opportunities online.
After you enter your market, budget, and rental strategy, you will be provided with suitable townhome listings that promise a good ROI when rented out. The best part is that those with the highest cash on cash return will be on top of the list, so that you can go straight to the most profitable townhouse investments.
3. Analyze Townhouses for Sale
Then, you need to analyze the precise investment potential of each property that catches your eye. You can use the Mashvisor rental property calculator for that purpose. Actually, you can click on any of the listings that the Property Finder provides for you to be taken to a page with detailed rental property analysis. It includes both short and long term rental strategies.
For each townhouse for sale, you’ll see the expected rental income, operating expenses, cash flow, occupancy rate, cash on cash return, and cap rate. In this way, you can know exactly what results you will generate even before you buy a townhome as an investment property.
Airbnb Rental Calculator
4. Check Out the HOA Rules
Last, since many townhouses are governed by an HOA, you need to check if this is the case with your selected listings. It’s important to meet an HOA representative and ask to see a copy of the homeowners association’s guidelines. You should read them carefully and understand whether you can rent out your townhome.
It’s even wise to talk to the HOA directly and let them know of your intentions to make sure they’ll not cause any trouble. That’s a step that Mashvisor cannot help with, but it should be pretty straightforward.
To start searching for the best markets and townhouses across the US, sign up for a 7-day free trial of Mashvisor.
How Much Does Buying a Townhouse Cost?
The price of townhouses in the US real estate housing market 2023 varies widely, depending on the location, the property size, the property age, and the amenities and extras it provides. Importantly for investors, all in all, townhomes are cheaper than single-family homes across the US market. It is because of the shared walls and the less outside space that they offer.
To find the prevalent prices of townhomes for sale in specific locations, you can use the Mashvisor platform.
How to Buy a Townhouse: 7 Tips
If you think that buying a townhome is the right investment move for you, below are seven tips to help you find the right townhouse to fit your needs:
Tip #1: Work With a Real Estate Agent
When you are thinking about purchasing any type of rental property, you should consider working with a real estate agent. They can help guide you through buying a townhome as well, especially if you’re a beginner investor or an out-of-state investor.
An agent will help get the best price for a townhome in a particular area. They can negotiate with the other agent and obtain the optimal price and terms. Additionally, a real estate agent will help keep track of all the paperwork involved in buying a townhouse. They can point you to the best home inspectors, attorneys, and other professionals you need in the process.
Keep in mind that in the US, the agent’s commission is covered by the home seller, so you don’t have to worry about paying more when hiring an agent.
To find the best agents in any US market, check out Mashvisor’s real estate agent directory.
Tip #2: Know the Neighborhood You Want to Invest in
Before you start your search for a townhouse to buy, you should take a look at potential neighborhoods. It is important to find an area that fits your specific investor needs and aspirations. Even though you won’t live on the property yourself, it’s important to consider things like schools, transportation, safety, amenities, and others. These are things that your renters will be expecting to find nearby.
While the Mashvisor tools can help you with the more quantitative side of the neighborhood analysis, you’ll still need to do some additional research to find out more about the quality of life in the area. There are plenty of online resources you can use for this, and your agent will be able to help you find out the rest. But it’s highly recommended that you visit the neighborhood yourself, too.
Tip #3: Review the HOA Rules and Fees
Some townhomes come with an HOA, which means regulations to adhere to and extra monthly payments.
Most importantly, review if renting out–especially on a short term basis–is allowed within the building. Check out if there are any rental activity regulations like minimum or maximum days per month or year. Meanwhile, you should also understand what changes you are allowed to make to the exterior of your townhouse and what changes you’re not allowed to make.
In terms of HOA fees, it’s crucial to know how much you’ll be expected to pay per month and what services this will cover. Then, factor this amount into your investment property analysis to make sure that your cash flow will be positive and your ROI–good.
You can easily enter the HOA fees in the calculations provided by the Mashvisor rental property calculator. All fields and numbers are customizable to tailor your analysis to your specific townhome for sale.
Tip #4: Prepare for a Potential Bidding War
Townhouses are a very common property for first-time homebuyers as well as investors. In some areas, they are highly desired due to the many benefits and the better affordability. Moreover, while the US housing market is cooling down, it’s not a buyer’s market yet.
So, if you are looking at a townhome in a popular area, you might find yourself in a bidding war against other buyers. If this happens, it is important to discuss with your real estate agent what to do and to determine how much you are willing to bid on a property.
Don’t go above what makes sense from a financial point of view. Think about the townhouse as an investment deal, so don’t let your emotions get the best of you.
Also, be prepared to go through a few potential homes for sale if the first one doesn’t work out.
Tip #5: Get Preapproved for Financing
Although townhomes are cheaper than single-family homes, they still cost a few hundred thousand dollars. It’s unlikely that you’ll be able to pay for the property fully in cash unless you already have a few rental properties and have been able to save up.
So, you need to look for and find the best loans for investment properties and see which ones you qualify for. Keep in mind that conventional mortgage rates are still significantly higher than they used to be in the past few years so an alternative financing method might be a better option. At the end of May 2023, interest rates for 15-year and 30-year fixed-rate mortgages were 5.97% and 6.57%, respectively.
Once you find the best choice for you, you should work on getting preapproved before searching for properties for sale. It will help you know how much money you have at your disposal so that you can focus your investment property search on this budget. Moreover, it will make you look like a trustworthy buyer, which will help in a bidding war.
Tip #6: Have a Home Inspection
Even if your townhouse is overlooked by the HOA, scheduling a home inspection before purchasing one is a must. It will provide you with an objective evaluation of the current state of the property, what repairs are needed, and whether the townhouse is worth the listing price.
As an investor, you need to know how quickly you’ll be able to start renting out your home after buying it. In addition, you should be aware of the money you’d need to put into getting it into a rentable state, as that will affect your profitability.
Tip #7: Check the Amenities
Before buying a townhome as an investment property, you need to find out if it has the amenities that tenants would expect and require. It will make it much easier to rent out, and decreasing vacancy is a guaranteed way to boost return on investment.
Check out for things like parking spaces, yards, and patios. See if the roof space is usable and whether the shared areas have a swimming pool or a gym. Furthermore, get to know whether it’s you or the HOA that takes care of the maintenance of each amenity.
Is It Worth Buying a Townhouse in 2023?: Conclusion
Overall, buying a townhome can be a lucrative real estate investment decision in 2023. It offers a lot of advantages that other property types don’t. Most importantly, townhouses tend to cost less than single-family homes and enjoy strong rental demand from renters in the city. On the flip side, you may face certain restrictions and fees from the HOA, so that’s something you need to consider.
If you decide that investing in a townhouse is right for you, remember to proceed as you would with any other investment. Find the best market and best property and conduct diligent analysis on both. If you need some extra help, Mashvisor can assist you along the way.
To learn more about how the Mashvisor platform can support your townhouse investments, schedule a demo with our team.