Here is everything you need to know about the pros and cons of townhouse investing and how you can estimate its rental income.
Real estate investors are always on the lookout for rental homes that could give them the biggest returns. And when it comes to rentals, they usually prefer single-family homes and condos or apartments. But as an investor, there is one property that you should consider, too. But is buying a townhouse a good investment?
In this article, you will learn all about the townhouse property type:
- What it is
- The difference between a townhouse and a condo
- The pros and cons of townhouse investment
- How to determine if a particular townhouse would be a good rental investment
Related: 7 Tips for Buying a Townhouse
What Is a Townhouse?
A townhouse is a multi-floor dwelling that shares a wall or two with an adjacent property. The person living in a townhouse will always have a neighbor connected next to them, but there is no one living above or below them. It is also usually part of a homeowners association (HOA).
A townhouse has its own entrance and maybe even its own basement, driveway or garage, and backyard. When buying this type of property, you will also own the land underneath it, making you responsible for exterior maintenance including the roof and the yard. However, you might encounter HOAs that assume responsibility for these tasks.
There are a variety of townhouses with different price points that you can buy. They can range from low-cost rowhouses in the city to huge dwellings that are comparable to single-family homes in the suburbs.
But are townhomes a good investment? They can be, but it is important for you to learn more about this property as well as the pros and cons of townhouse investing before you proceed with buying one. Depending on where you invest, you could either rent out one townhouse to several tenants or one household and still earn the maximum profit possible.
Differences Between a Townhouse and a Condo or Apartment
To be fair, many people confuse townhomes with condos, but they each have key features that differentiate them from each other. The first difference is ownership. When you buy a townhouse, you also own the underlying land. Whereas with a condo, you only have ownership of the unit.
And because you own the land underneath the townhouse, depending on the HOA, you may also be responsible for maintaining the exterior, roof, and yard. Meanwhile, you only have to take care of your condo’s interior. While the additional responsibility may be a hindrance to some, there are tenants who would love the added responsibility as it would also mean they can decorate outside their home.
As for price, townhouses tend to be more expensive than condos. However, HOA fees for condos tend to cost more than for townhouses. Lastly, in a townhouse, your neighbors are connected adjacent to you. But in a condo, you may have neighbors living next to, above, and below you.
If there is one thing that townhomes and condos have in common, it would be the services and amenities available to them. Townhouses that belong to an HOA would have access to services like pest control, HVAC inspections, and trash collection included in the fee that they pay each month. They could also have amenities like a swimming pool, gym, and car washing facilities. These are the same perks that condo dwellers usually enjoy.
10 Pros and Cons of Townhouse Investment
When buying a new property, real estate investors would often ask, “is a townhouse a good investment?” The short answer is yes, though it has its pros and cons.
Pros of Investing in a Townhouse
When comparing properties, the townhouse is right in the middle of a single-family home and a condo/apartment. It usually enjoys similar benefits to a single-family home without you having to pay as much, but it may require more maintenance than a condo.
#1: Lower Purchase Price
When comparing the price of a single-family house vs townhouse, the latter comes ahead in terms of affordability. This would be one of the main reasons why buying a townhome is a good investment.
If you are new to the investment market, you will have an easier time building your portfolio with this property even if you start with low capital, since it requires a smaller downpayment.
#2: Positive Cashflow
Cash flow is the money that remains from your rental income after paying off expenses. Because a townhouse is relatively affordable, you can get better cash flow from renting out the property. Having a positive cash flow is one of the key metrics of a profitable rental home. Even if you took out a home loan, the lower monthly mortgage payment could still net you positive at the end of each month. Of course, this would depend on how much you charge for rent.
#3: Value Appreciation
One of the pros and cons of townhouse ownership is its market value. Like other real estate properties, the value of townhouses tends to appreciate over time, though not as much as single-family homes do. Its market value depends on the condition of the local market and the desirability of that particular property. If a townhouse is in great condition and in a desirable location, then its value is likely to go up. Otherwise, its value would stay the same or even decline.
To get a sense of how a townhouse may appreciate, you could ask your real estate agent to get you the historic sales data for that townhouse as well as similar properties in the neighborhood. These are what real estate insiders call “sales comps.” Looking at these data will help you determine whether the townhouse’s value trend is due to its condition or if it is because of the local market.
Related: How to Calculate Real Estate Appreciation
#4: More Freedom
If you are looking for a property to put up for rent, you will have an easier time finding tenants when you offer up a townhouse. Compared to condos, this type of property provides a bit more privacy. They tend to be less packed together, and unlike condos, there are no neighbors above or below the townhome.
Of course, that would depend on the number of households you will allow renting your townhouse. Depending on the size of the property and the type of neighborhood, you could have several tenants in one building.
And because townhouses usually have a yard that you also own, you or your tenants could decorate the outdoor space for relaxation or recreational purposes. These benefits will make your tenants happy, which would result in them staying longer or giving you good reviews online.
#5: Less Maintenance
Because of the smaller yard and at least one shared wall, there is less square footage for you to take care of compared to maintaining a single-family home.
This factor can be considered both pros and cons of townhouse living, so you just have to know what type of tenant to look for. A townhouse is also a great choice for tenants who are looking for lower-maintenance properties (i.e. less cleaning) without compromising their privacy and freedom.
Cons of Investing in a Townhouse
Of course, with every advantage is a disadvantage. When comparing the townhouse to a single-family home, you will find reasons why many investors still go for the latter.
#1: Less Space
Compared to single-family homes, townhouses tend to be more compact, which could mean less living space. Lack of storage could be an issue for your tenants.
If you want to attract tenants who are families or have disposable incomes, look for a townhouse with added features such as a garage or a basement.
#2: Extra Noise
Even though townhouses provide a bit more privacy compared to condos, your tenants will still be sharing a wall or two with your neighbors. Depending on the building material, it is highly likely that they are going to hear each others’ noises.
This factor may not be attractive to tenants who are looking for a more quiet residence. So when promoting your listing, do not hesitate to tell prospective tenants about what the neighbors are like, both the good and the bad. While this may make your search challenging, the people who would end up leasing your property are more likely to stay for the long term.
But if you plan to hack the townhouse and rent it out to several people at a time, make sure to set their expectations and consider their privacy during renovations.
#3: Homeowners Association (HOA) Fees
Many townhouses are part of an HOA, though you might still encounter a few that are not part of one. If the property you want to buy is under an HOA, you need to pay fees to the association to help cover the costs of community upkeep.
While these fees may cut into your income, consider looking at the benefits that an HOA townhouse is getting. If they are doing well in keeping the neighborhood clean and desirable, this would help you attract and keep tenants. So instead of thinking of HOA fees as sunk costs, consider them part of your investment.
Related: Are HOA Fees Worth It? A Guide for Property Owners
#4: HOA Rules
Aside from paying the HOA fees regularly, you and your tenants also have to abide by their rules. When buying a townhome, you also have to watch out for HOAs that have restrictions regarding long-term leases or short-term rentals. While the HOA’s rules are created to help keep the community desirable, there might be a few rules that would keep you from making money through your townhouse rental.
So before closing on the townhouse, review the HOA’s bylaws and consider getting your neighbors’ insights on the association. If you agree with all of the rules and you notice that the residents are satisfied with the HOA, then you know that they would uphold their duty in maintaining the neighborhood.
#5: Lower Value Appreciation
While the market value of townhouses does increase, it does not appreciate as much compared to other property types such as single-family homes. Townhouses are more suited for investors who will use them as rental properties. They may not be good for those who want to hold on to the property before reselling.
How to Determine if a Particular Townhouse Would Be a Good Rental Investment
When buying a townhouse for your investment portfolio, looking for the cheapest property possible is not enough. You need to discover if the townhouse you are looking at would make a good rental in its location. You should also consider whether to put it up for a traditional lease or as an Airbnb rental. Here are three steps to finding out if a particular townhouse would give you an ideal rental income:
Step 1: Set Rental Fee
When estimating how much you could charge, you could ask your agent to find rental comps or comparable rental homes. These are rental properties similar to the one you are buying that are located in the same area.
A faster way is to use Mashvisor, which can do the same thing your agent would but only takes minutes instead of hours or days. When looking for townhouses for sale on our website, you will find the comparable rental income for each property based on the rental strategy and the neighborhood.
Step 2: Estimate Expenses
Make a list of your expenses related to the property, including your mortgage payments, property tax, property insurance, and HOA fees. If you use Mashvisor’s investment property calculator, it will create an estimate of these costs based on what is usual in that area and your rental strategy. You can also add custom expenses for any costs that are not listed there.
Step 3: Calculate Cash Flow
You can calculate your rental townhouse’s cash flow by subtracting your estimated expenses from the expected rental fee. A positive result means that you can get money left over from that particular property.
And if you use Mashvisor’s calculator, you will also find cash-on-cash returns and cap rates. There is also a table that shows your accumulated investment returns year on year.
The Townhouse: A Great Property for the Beginner Investor
As a multi-floor dwelling, you do not have to limit renting out a townhouse to one household. If you are able to renovate the property so that multiple tenants can stay there at the same time, then you can maximize your rental income.
And unlike a condo, a townhouse can have a driveway, garage, or backyard that increases its value for tenants. They would not have to worry about where to park their car or feeling cooped up indoors.
Now that you know about the pros and cons of townhouse investment, it is up to you to decide whether to invest in this type of property. When you are ready, you can use Mashvisor’s Property Finder to search for the most profitable townhouse currently on the market.
To get access to our real estate investment tools, sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.