Are you planning to invest in a townhouse complex but don’t know how to begin? This guide has everything you need to know to help you get started.
Table of contents
- What Is a Townhouse Complex?
- Pros and Cons of Investing in a Townhouse Complex
- How Much Does It Cost to Build a Townhouse Complex?
- Step-by-Step Guide for Buying a Townhouse Complex
- How Can Mashvisor Help You Choose a Profitable Investment?
Investing in a townhouse apartment complex requires more time, determination, and commitment. Real estate investors planning to invest in townhouse complexes should be prepared to offer a more profound sense of commitment and involvement than investing in single-family homes. Aside from being financially ready, it would be best if you also got yourself familiarized with the ins and outs of having a multifamily investment to help you become successful.
What Is a Townhouse Complex?
A townhouse complex is a single-story, two-story, or three-story residential building with three or more dwelling units, where each unit has separate access at the ground level. With townhouses, the units share walls with the next-door house. Townhouse complexes have more than one housing unit, and each unit has its own kitchen and bathroom. Some townhouse complexes have a shared garage, while others have a separate parking space typically located beside each unit. Most townhouses are part of a homeowners association.
Townhouse vs. Condo
A condominium or condo is typically a high-rise building with several condo units that can be sold to different individuals. If you own a condo unit, you can rent it out as a traditional or short-term rental. You can also own multiple condo units in the same building. Residents of a condominium usually share the same facilities and pay the homeowners association (HOA) fees for the maintenance and insurance of common areas.
The significant difference between a condominium and a townhouse is how unit owners can access their property. A condominium shares the same entrance at the ground level for all unit owners because all condo units are located in the same building. With a complex townhouse, however, each unit has a separate entrance on the first level. Additionally, you will also own the underlying land when you buy a townhouse. With a condo, you will only own the unit you purchased, not the land.
Related: What Is a Detached Condo?
Townhouse vs. Apartment
An apartment is a residential building with individual units rented out to multiple tenants. While an apartment and a condominium may look the same, they have different ownership structures. With a condominium, units can be sold to different individuals. The condo unit owners can rent out their property to tenants, and they manage their own rental property investment. With an apartment, the units can only be rented out, not sold. The tenants in an apartment building are managed by the same entity.
The difference between an apartment and a townhouse complex is its structural management. A townhouse is free-standing, with separate access from the ground floor, just like a traditional house. An apartment is a unit in a larger structure, usually a high-rise building. All tenants in an apartment have the same entrance and share common spaces like elevators and hallways.
Related: Should You Invest in a Cheap Apartment for Rent?
Pros and Cons of Investing in a Townhouse Complex
Before you start looking for a townhouse complex for sale, it’s important to determine whether this type of income property will make a worthwhile investment. In general, investing in townhouses can be profitable. However, it also has its share of benefits and drawbacks.
Pros
A townhouse complex is like a hybrid of an apartment and a single-family home, and it contains three or more townhouse units. Below are the benefits of investing in townhouse complexes:
- Cash flow
One of the most essential benefits of investing in townhouse complex rentals is having a better cash flow from your rental income. Since you have more than one unit to rent out, you can earn more revenue from multiple tenants. If one unit is vacant, you’ll still have cash flow from other units.
Related: A Complete Beginner’s Guide to Cash Flow Formula
- Passive income
Investing in townhouse complexes in strong rental markets is a great way to earn passive income. The monthly rental income you’ll earn from tenants can be an excellent source of funds for your savings and other expenses.
- Tax benefits
Having multifamily investment property offers appealing tax benefits to real estate investors. You can deduct certain expenses, including maintenance and repair costs, utilities, insurance premiums, marketing expenses, and property management fees.
- Equity growth
Similar to most investment properties, you will gradually build up your equity in your townhouse complex as you pay off your mortgage. You can use your equity to scale your investment or buy another income property to add to your investment portfolio.
- Value appreciation
If your investment property is well-maintained and located in a desirable neighborhood, its market value will most likely go up over time. As the property value appreciates, so will your equity.
These benefits show that townhouse complexes can be a worthy investment. If you want to find townhomes for sale in your preferred location, use Mashvisor’s investment property search feature to get started.
Cons
Investing in a townhouse complex needs more time, energy, and commitment because you’re going to manage more than one housing unit. Here are the potential drawbacks that you need to be aware of before you decide to invest in townhouses:
- Bigger initial investment
Townhouse complexes are bigger than single-family homes, which means you’ll need to spend a higher amount of initial investment. Upfront costs are also higher, especially if you invest in bigger cities. Because initial investment is high, it may take longer to realize your return on investment.
- Bigger property to manage
Multifamily homes usually have more than two housing units—this means you also need to double or triple your efforts in managing this type of investment property. Investing in townhouse complexes requires a lot of attention and time, and it’s a big responsibility you need to prepare for.
- Maintenance expenses
Townhouse buildings often need regular maintenance, which is an additional expense for investors. You can expect to spend more money on repairs and maintenance because you need to maintain more than one unit at a time.
- Time investment
As mentioned, investing in townhouse complexes is a huge responsibility, and you need to invest more time to make this business profitable. From finding multi-unit properties for sale to managing your tenants and taking care of your property, you need to spend more time and be truly committed to this venture.
- Competition
Many real estate investors prefer to invest in multifamily homes because this type of income property offers so much potential for profits. However, townhouse prices are rising quickly in strong rental markets, making it more challenging for investors to find a property to buy.
How Much Does It Cost to Build a Townhouse Complex?
According to Fixr.com, the national average cost for building a single townhouse unit ranges from $115,500 to $237,500. A 1,500-sq.ft. townhouse has an average cost of $175,000. A low-end townhouse with 750 sq. ft. has an average price of $80,250. A high-end, 2,500 sq.ft. townhouse located in an expensive city costs around $335,500.
The cost of building a townhouse complex is relatively high, especially in big cities and urban areas. This is because the costs of construction materials, labor, and regulatory compliance keep on rising. Thus, many real estate investors find buying a fully built townhouse complex more cost-efficient than building one.
Step-by-Step Guide for Buying a Townhouse Complex
Buying your first townhouse complex can be daunting, especially if you don’t know what to look for and how to begin. While investing in a rental complex can be intimidating at the beginning, this can be a lucrative investment, and you will reap the benefits in the long run.
When you’re ready to invest in townhouse complexes, follow these simple steps to get started:
Step 1: Find the Right Location
Location is a crucial aspect that can affect the overall profitability of your investment. To determine the best place to invest in real estate, you need to consider several factors such as the population, economy, job opportunities, cost of housing, and demand for rentals. You also need to check the real estate analysis of a particular market, most especially its price to rent ratio, traditional cash on cash (CoC) return, cap rate, and average rental income.
With Mashvisor’s Investment Property Search, you can identify which part of the city of your interest has available townhouse complexes for sale that would be optimal for your chosen investment strategy.
Step 2: Set a Budget
Once you’ve chosen a location, the next important step is to check your finances and set a realistic budget for your investment. Your budget should include the property price, as well as costs of financing (downpayment and closing costs) and repairs. Try to forecast your potential cash flow when considering your budget so you will know how much rent you should charge your tenants to earn a profit from your income property.
Step 3: Get Pre-approved for Financing
After setting a budget, you need to start finding a lender that could finance your purchase. Take your time to shop for lenders so you can get the best rates possible. Try to get pre-approved for financing by at least two lenders—this will give you a fallback option in case something goes wrong with one of them.
Step 4: Find a Property
After making sure that you have financing options in place, you can start finding properties that would fit your budget in your preferred location. This is one of the most challenging steps because finding an investment property that will suit you takes a lot of time and effort. Fortunately, you can do this online without having to leave the comfort of your home or office. You can work with real estate agents to help you get access to MLS listings, or you can subscribe to a real estate data analytics company like Mashvisor.
Step 5: Inspect the Property
Once you find a property that you like, make sure to visit the location so you can check the actual condition of the property. This can help you assess how much you need to spend on renovation or repairs. Since townhouse complexes are significant investments, it’s critical for you to make a thorough inspection. You may also want to bring someone who is knowledgeable about plumbing, HVAC, and electric systems to ensure that everything will be adequately assessed.
Step 6: Make an Offer and Finalize the Deal
After you have determined that the property is worth your time and money, you can make an offer and finalize the deal. Return to your chosen lender to complete the financing and make sure that you pick the one that offers the best rate. You also have to ensure that there are no problems with the title and appraisal report conducted by the lender.
Related: How to Make an Offer on a House That Is Overpriced
Step 7: Consider Hiring a Property Manager
This step is optional, but you may want to consider hiring a property manager to help you with your investment. A townhouse complex is such a huge investment, and if this is your first time managing one, you may need all the professional assistance you can get. When choosing a property manager, make sure to check reviews about their company and learn about the other properties they manage. It’s also important to discuss your expectations with the property manager before hiring them.
Related: 10 Common Property Manager Responsibilities
How Can Mashvisor Help You Choose a Profitable Investment?
Finding the perfect townhouse complex can be time-consuming and tedious, especially if you don’t know where to look. Fortunately, you can easily browse thousands of available investment properties online and check each property’s real estate market analysis through Mashvisor.
Mashvisor allows you to search for income properties in your chosen city or neighborhood based on customizable filters such as budget, property type, rental income, CoC return, and more. You can also find off market properties if this is the type of investment you are after.
You will get an overview of the property’s real estate data, including its cash flow, cap rate, traditional or Airbnb occupancy rate, and rental comps. Moreover, Mashvisor’s rental property calculator tool is helpful in assessing a property’s profitability potential. You can input your own figures for financing and expenses to get a more personalized calculation.
Subscribe to any of Mashvisor’s available plans and start finding the best income property available. You can start a free trial to get a first-hand experience of how Mashvsior works.