Are you planning to expand your real estate portfolio in the US housing market 2020? Then consider investing in townhouses. Compared to other housing types such as condos, multi-family homes, and detached single-family homes, townhomes come with distinct advantages. Let’s take a closer look at townhouse investments to help you decide if buying a townhouse is right for you.
Related: Townhouse vs Single Family Home Investment
What Is a Townhouse?
A townhouse is a residential building that has multiple stories and is attached to other properties by communal walls. Also known as row houses, townhouses are characterized by a private front and back entrance. Blocks of townhouses are common in densely populated cities all over the US.
Townhouses vs Condos
Though townhouses and condos share some common qualities, they have major differences. One of the main distinctions between a condo and a townhouse investment is ownership. For a condo, the property owner only owns the interior of his/her unit, while the Homeowners Association (HOA) owns the communal areas, the back and front lawns (if they exist), and the exterior. With a townhouse, however, you own both the interior and exterior.
In terms of appearance, townhouses are almost always multiple stories tall and built in a row. On the other hand, condos usually vary widely in layout and style. They can be cottages, ranch-style, and even in an apartment building.
Maintenance fees and HOA fees are often higher for condominiums than townhouses. Owners of condos usually have access to more services such as pest control, lawn care, and community spaces such as a gym or pool which drives up the fees.
Related: Condo vs Townhouse: Which Is a Better Investment?
Is Buying a Townhouse a Good Investment?
Yes, buying townhouses to rent comes with a wide range of advantages. Here are some of the benefits of owning a townhouse:
- Affordability – Townhouses are usually more affordable compared to single-family properties in the same location. This is because it is less expensive to build properties that are attached.
- Less maintenance – Since townhouses are located on small pieces of land, it is much easier to maintain both the interior and exterior spaces.
- More ownership – As mentioned earlier, you have ownership of the interior as well as the exterior of the investment property. This gives you more freedom to make changes to the exterior of your rental property.
- Strategic locations – Most townhouses are located in close proximity to major traffic routes and school zones. This makes them attractive to potential renters.
What to Look for When Buying a Townhouse for Investment
1. Affordable Price
How much do you need to buy a townhouse? This is the question most real estate investors ask when thinking of buying a townhouse to rent out. However, the answer will depend on where you’re looking to buy a townhouse. For example, in the state of Maryland, a 3-bedroom, 3-bathroom townhouse would cost you around $300,000 (in Brandywine). In other locations, it could be much cheaper. Do a little research on median property prices of the location and take a look at a few townhouse listings to figure out what you’ll need. Most importantly, be sure it fits your budget and that, if you get a mortgage, you can afford to make the monthly payments on your townhouse rental.
2. Good Return on Investment
Mashvisor will help you find and analyze a wide range of investment properties all over the US. Using the Property Finder tool, you can compare different townhouses based on their listing price and cash on cash return. You can find townhouses for sale that match your goals in terms of return on investment and optimal rental strategy. The Property Finder tool also allows you to search in multiple cities at once.
If you find one in your budget that looks profitable, continue analyzing the return on investment with Mashvisor’s investment property calculator using metrics like occupancy rate, rental income, and cap rate.
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3. Lenient HOA Rules and Regulations
Before buying a townhouse as an investment, take time to learn about the homeowners association. If the townhouse complex has communal areas such as a swimming pool and a parking lot, they are probably controlled and regulated by the HOA. While you may have ownership of the exterior of your investment property, some HOAs also regulate the kind of improvements you can make. If you find the rules and regulations too unreasonable, you could consider buying a townhouse elsewhere.
HOA fees are another important consideration when looking for townhomes for rent. Some townhouse HOAs offer amenities such as community gyms, libraries, hot tubs, saunas, playgrounds, and swimming pools. Others also handle the maintenance and landscaping of the exterior of homes. Such services come at a cost, which means property investors might be required to pay lots of money in HOA fees. In addition to monthly dues, there could be other charges to cover legal fees, security upgrades or emergency repairs. If these add-on costs are too high, you might not make any profits from renting out your house.
Related: The Best Tips for Real Estate Investors to Deal with an HOA
4. Privacy for Your Tenants
In a townhouse, your tenants will have neighbors on one side or both sides. You should, therefore, find out how much privacy your tenants will have living in that rental property. Are the houses soundproofed? Will your tenant be able to sleep in peace without hearing a child crying next door? Or play music without disturbing the neighbors? Such issues can make or break your efforts to boost occupancy rates and earn a good profit from your rental property.
5. Protective Insurance
Having an insurance cover is very important to ensure that your income property is protected in case of any disasters. In some places, the homeowner’s association will even cover a portion of the insurance. When looking at insurance options, find out what kinds of disasters are covered. For example, is damage from floods or earthquakes on the list? If the rental property is in an area prone to certain natural disasters, make sure they are included in your insurance.
6. Lenient Covenants, Conditions, and Restrictions (CC&Rs)
CC&Rs are requirements that come along with residing in specific communities. For example, covenants, conditions, and restrictions can determine whether you can have pets, who can reside in your property, and whether you can hang your clothes outside. Though CC&Rs can be limiting, they have some advantages. Besides preventing common neighborhood annoyances, CC&Rs can make the properties look safer, neater, and boost townhouse resale value. Be sure to get familiar with the CC&R documentation before buying a townhouse.
Conclusion
Whether in San Francisco, Miami, New York, Boston or Washington, townhomes can be a very lucrative real estate investment. Even if you are a beginner real estate investor, you can easily learn how to buy a townhouse and rent it out for positive cash flow. Besides doing your due diligence, be sure to work with an experienced real estate agent and use Mashvisor’s investment tools to find a good townhouse. This will help you understand the pros and cons of buying a townhouse, thus avoiding costly mistakes.
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