To many investors, townhouses represent attractive investment options because of their low cost of entry, numerous community amenities and a nearly maintenance-free environment. Because land typically comes along with a townhouse purchase, many investors also expect high appreciation for these properties. But despite these benefits, a number of factors can make townhouses less than ideal as investment vehicles.
When it comes to buying a home, most people immediately think there are only a couple of options: apartment/condo or single-family home. But ignoring the feasibility of a townhome would be a huge disservice.
Are you a new real estate investor wondering “Is buying a townhouse a good investment?” Well, the answer may not be as straight forward as you think!
As you begin to make your way into the real estate investing industry, you need to learn to do proper research. This includes researching the type of investment property in mind, as well as asking yourself “Is 2019 a good time to buy a house?” Because if the answer to the second question is no, then there’s no need to even look into townhome investments right now, is there? And there are several factors and pros and cons that you must learn and read about when investing in a townhouse.
What Is The Definition Of A Townhouse?
Townhouses walk the line between detached single-family homes and condos, offering the best of both. Since they differ widely by size and structure from area-to-area, they’re difficult to define by appearance alone. Generally, however, these are multilevel residences attached by a communal wall to another residence or two. Some may also have small yards or patios.
These residences differ from a condo in ownership. Unlike a condo, townhome owners typically own both the interior of the home and the exterior land (a small yard or patio). Like a condo, owners may pay an HOA fee for things including care of common areas and trash pickup. Planning for a new look for your house? Look no further! MJS Construction Group is here to help in your dual occupancy builder Melbourne.
The Census Bureau’s definition of a townhouse provides some guidance, at least when it comes to what qualifies as a single-family home. In order for a townhouse to be classified as a single-family structure by the United States Census Bureau, it must have no units above or below, be separated by a ground-to-roof wall, maintain separate heating systems and have individual meters for public utilities.
The History of the Townhouse
Wealthy British landowners and nobility originally coined the term “townhouse” in the 18th century. At different points throughout the year, these families would pack up their country estates and bring their entire households – servants and children included – into the city for social gatherings, balls, shows, and black-tie events.
Townhomes allowed these wealthy families to comfortably fit into a single property in the middle of town, without owning a bunch of lands that didn’t get used much. In other words, they were compact yet roomy vacation homes.
As America continued to grow into the late-18th and early-19th centuries and the demand for housing increased, townhomes became popular in the United States as well.
“In North America, the townhouse evolved and came to be known as a house on a small footprint of land comprised of multiple floors,” real estate professional Todd Mahovlich explains. “The homes were usually within walking distance of mass transit and industrial areas and were luxurious enough to suit the wealthy.”
While initially popular in large cities like New York, Boston, Philadelphia, Chicago, and San Francisco, the townhome eventually became a staple in hundreds of cities and towns across the country – including Houston.
2019 Real Estate Market Forecast
Let’s answer the first question in our research: Is 2019 a good time to buy a house? This is a major question that can be answered easily by looking at the real estate market forecast for this year. Of course, one of the main topics that have been widely discussed by experts in the field for 2019 is the expected rise in mortgage rates. Mortgage rates are expected to reach 5.8% in 2019. While the rate has increased, experts do not advise against buying an investment property as the mortgage rate is historically low.
Also, the expected rise in mortgage rates is predicted to deter some home buyers, which could mean less competition for you in the market. This will likely cause a halt in the rise of property prices. In 2019, properties for sale were expected to remain at the same price or even fall in price due to the expected decrease in buyers.
Finally, another important point that a real estate investor must study is the rental population in the market. According to several experts, older and younger generations alike are steering clear of buying property and choosing to rent for long periods. This is great news for you because it means you will potentially have a larger pool of tenants to rent your property. So, is buying a townhouse a good investment in 2019? Well, it seems the answer is yes.
Advantages of a Townhouse
Here’s what most of us think we know about townhouses: They’re glorified apartments. They’re houses squished together so hard they share walls. They’re ruled by iron-fisted homeowners’ associations who will force you to dye your dog to match your window shades.
It turns out, most of us are straight-up wrong about townhouses. They’re not apartments or houses, or even condominiums. And HOAs will not make you dye your dog. Probably. (Just in case, maybe you should ask before you move in if you feel strongly about dog dyeing.)
Be a Lazy Bum, Have a Nice Yard
Granted, that little piece of planet Earth that comes with the purchase of your townhouse isn’t going to be huge. It’s going to be a patch of grass, maybe a shrub or a flowering tree, possibly a petunia border.
Here’s where the homeowner’s association comes in. You pay dues every month to these folks, and they take care of that patch of grass. And you are repainting the exterior. And re-shingling the roof. And you are blowing the leaves out of your parking space. And, if you live in a less than tropical locale, removing the snow in the parking lot.
You can probably plant a row of rose bushes along the front walk if you’re so inclined, but no one will look askance if you don’t. You need never throw out your back bending over to pull one stupid weed again.
Of course, every HOA (as the homeowners’ association likes to call itself) has a different list of maintenance items it’ll take care of, so you’ll want to make sure you all agree on who has to do what in the yard. But often, the HOA would prefer you keep your flamboyant red hot pokers (calm down, it’s a flower) and bright pink window shutters away from the manicured front lawn.
Never Leave the Compound
When you buy a townhouse, it comes with a community, and that community has amenities. Most townhouse developments have a gym, a pool, a laundry room, tennis courts and even a recreation room that owners can sign up to use for parties.
Say your townhouse community doesn’t have one of these things, like tennis courts, and you know in your heart that you are the next Roger Federer or Serena Williams. (You’re not, but let’s go with the example.) In many townhouse communities, owners can pool their money to get these facilities added, as long as there’s room to add such things on the property.
Officially, as a townhouse owner, you own a percentage of each of the common facilities. So if there are 50 units in your development, you own 2 per cent of the laundry room. If you choose to think of one of the sofa cushions in the rec room as your 2 per cent, go ahead, but be aware that almost no one else in the development will agree with you.
Keep Your Cash
Often, townhouses are cheaper than free-standing houses, or single-family homes, as they’re known in the real estate biz. Sure, once you buy a townhome, you’ll be paying a mortgage and HOA fees, while your friends in a regular house are only in for the mortgage. But you know what else they get? A yard full of weeds, a driveway full of snow and a roof full of leaks. Who wants an HOA now, huh? MJS Construction Group has the best range of dual occupancy builder services to help you create your dream house.
Townhouses are usually, but not always, multilevel affairs that share a side wall or two with another townhouse. They can have as many bedrooms and bathrooms as will fit in the floor plan, just like a single-family house. They can be close to the city centre, or they can be out in the ‘burbs surrounded by vineyards or forests. The point is, you can get a lot of the same stuff in a townhouse that you can find in a regular house, but you typically pay way less for it.
Sometimes you can find better stuff in a townhouse — that is if you’re willing to share a wall or two. Townhouses are often newer than single-family homes that are on the market, so the floors and walls won’t slope like a funhouse. Townhouses sometimes have the fancy upgrades built right in that you otherwise couldn’t afford in a house, like granite countertops and high-end stainless steel appliances, or hardwood floors, or eco-friendly materials like cork and bamboo.
Keep Tabs on the Neighbors
Hey there, Nosy Nellie, have we got a townhouse benefit for you! The units are close, and the parking areas are often shared, so you can sit by the window and watch everyone come and go all day and all night. There’s another way to save money: Watch the neighbours instead of TV. You can ditch the cable bill.
The truth is, a bit of Nosy Nellie-ish behaviour does benefit the neighbourhood. Being part of a townhouse community means neighbours are more likely to know one another and therefore know if someone new is creeping about with a black eye mask and a canvas bag slung over his shoulder. If Nosy Nellie knows her neighbours are out of the house, she’ll be more suspicious of noises next door when she puts the empty glass between the wall and her ear.
Also, according to Joan Rogers the real estate agent, “many developments have rental caps as far as how many units can be rented out at a time,” say ten out of the fifty in the development. Owners have a stake in the development; renters, not so much. With less turnover, the neighbourhood is more stable, and Nosy Nellie knows who to smile at and who to give the ol’ stink eye. And if there’s more stink eye than smiling, there’s always the HOA to appeal to about the renters.
Have the Neighbors Keep Tabs on You
For seniors or anyone who is, as Ms Rogers so delicately put it, “medically fragile,” having a Nosy Nellie listening at the wall isn’t so bad for those folks, either. “There can be a real advantage to having neighbours close by, while not being in a ‘retirement home,’ and still having the advantage of building equity,” she noted.
There’s a lot to be said for less yard maintenance, on-site exercise and laundry facilities and knowing all your neighbours when you’ve had a little mishap. Or a big mishap. However big your mishaps tend to be, townhouses mean there is likely someone around most of the time to help you.
That works for frequent travellers, too. Alert your immediate neighbours and the resident Nosy Nellie that you’ll be out of town for a month, and they’ll keep an eye and ear out for your place. And when you get back, the yard won’t be a weedy mess. But please bring a little trinket for Nellie. She does so much for the community. Maybe a nicer crystal glass to put between her ear and the wall?
The Disadvantages of Living in a Townhouse
There are advantages to calling a townhouse home, but there are also reasons why people decide to purchase single-family homes instead. With that being said, let’s take a brief look at some of the disadvantages of townhomes.
One of the biggest issues people have with townhouses is that you’re sharing a physical wall with neighbours on either side. This might not be an issue, but it could prove to be problematic if you live next to people who are, let’s say, less than courteous. Your tiny backyard also won’t be nearly as private as it would in a normal neighbourhood with lots of landscaping and space between lots.
Depending on the development, the HOA may have very strict restrictions on the changes you can make inside and outside of the home. If you’re someone who likes renovations and updates, this may stifle your creativity and severely limit your options.
You may assume that financing works the same regardless of what type of property you’re buying, but this isn’t always the case. If you’re buying a townhouse, you may find that your lender treats it more like a condo than a house.
“Some lenders choose to underwrite all townhomes as if they were condos, leading to higher costs. Some have more nuanced guidelines,” explains Gregory Erich Phillips, a veteran in the mortgage industry. “If you are buying in an area with a lot of townhomes, it’s a good idea to find a lender with experience in the area. Maybe even speak to the other owners to find out who they used for financing.”
You might get a great deal on a townhome when buying, but you may also have to dish out that same discount when you eventually decide to sell.
“Resale values on townhouses sometimes lag values of single-family homes in certain markets,” personal finance expert Neil Kokemuller writes. “This is especially true in communities that have seen an influx in the availability of condos and townhouses in the early 21st century. Some builders replicate successful developments near the same areas — in effect creating your same home, but newer.”
On the flip side, townhomes are often easier to rent out than single-family homes. When you do decide to buy it again, you may be able to rent it out and pick up an additional income stream.
Is Buying a Townhouse a Good Investment? – The Pros
- Cost: Investing in townhouses to use as a rental property is a great idea when you look at the costs. The prices of row houses in most areas around the United States are substantially lower than that of a single-family home. If you have a limited budget, then investing in townhomes is a good option.
- Rental Property Management: The complex property manager takes care of every unit in a townhouse complex. This is perfect for you as a real estate investor because you never have to worry about rental property management at all.
- Maintenance: Since you pay monthly maintenance fees, the association responsible for the complex will take care of any maintenance needed on the rental property. You will still be responsible for some maintenance, however, but the association will take care of a great deal.
- Great Location: Is buying a townhouse a good investment when looking at the location? The simple answer is yes! Townhouse complexes are often located in great areas near amenities, transportation, and schools. This is a huge plus when you are marketing the property as a rental.
- Townhouses Are Often Modernized: While you may have to cut some corners in terms of age of the home when buying a single-family property to find an affordable option, the same is not true for a townhouse. You can often find townhomes with very modern designs and features that are attractive to potential tenants for a great price.
- Rental Income: Townhouses have the potential to bring in high rental income. They are popular among families who want affordable housing that comes with space around the home for their kids. You can make a good return on investment with the steady rental income from a townhouse investment. Finding the right duplex build is an important decision. Check out our range of the best home design constructions at MJS Construction Group.
Is Buying a Townhouse a Good Investment? – The Cons
- Maintenance Fees: While having someone else take care of maintenance is a huge plus, paying maintenance fees is not a pleasant experience. Fees are sometimes steep and often increase, sometimes dramatically, without much notice.
- Real Estate Investment Loans: When it comes to financing a townhouse investment, it may be more difficult than you think. Banks are a lot more hesitant to give investors real estate investment loans when investing in townhomes, even new ones.
- Appreciation Fail: Unfortunately, making money in real estate is not all about rental income. A huge part of the equation will be the investment property’s resale value. Keep that in mind, when looking at townhomes as they are notorious for how difficult it is to raise their value. Unlike detached single-family homes, townhouses may not appreciate very much or even at all. This could harm your return on investment potential when you sell the property.
- Limited Use: Since your townhome is part of a complex, you must abide by the rules. This means not being able to rent out your property in all the ways you want. You may be investing in townhomes to rent out on Airbnb. However, this might not be possible, depending on the complex you buy-in.
When it comes to making money in real estate, it is all about doing enough research. The advice above is only the beginning for you when buying an investment property. It is now your turn to find out more about investing in townhouses for rental. Start by searching for “townhomes for rent near me”, “how to find an investment property”, and “rental property calculator” online. These searches will help you in different ways when learning how to find an investment property.