The number of people renting homes today is the highest that has been seen over the past half a century. It’s estimated that more than 30% of Americans are leasing, which highlights the potential of investing in real estate in terms of rental income.
For many investors, townhouses are attractive investment vehicles because they have low maintenance costs, come with several communal amenities, and are relatively inexpensive. What’s more, because they come as package deals with land included, investors can expect their value to appreciate over time.
There’s no better time for real estate investors to invest in strata-titled properties such as villas or townhouses. So if you’ve been wondering, “Is buying a townhouse a good investment?” then stick around as we take a deep dive into townhouses, real estate market value, as well as the pros and cons.
And if you think a townhouse seems like the right investment for you, check out Zumbly to look for townhouses available in your area.
But first, let’s be clear on what a townhouse is and isn’t.
What is a Townhouse?
A townhouse, aka rowhouse, refers to one unit among several properties that are typically attached to a much larger unit. What makes townhouses distinctively different from detached houses is that the house is conjoined with other properties.
What’s more, unlike apartments that are leased out, townhouses have one or more owners. They are properties with their backyards plus a shared common space between the larger units. They are broadly classified into two main categories, i.e., a regular or corner lot. Unlike regular lots, which are attached to two properties on both sides, corner lots are only connected to a single unit on one side.
Townhomes typically come with amenity and maintenance fees used for caring and maintaining those communal areas. Additionally, they might be part of an HOA or Homeowners Associations that’s responsible for organizing landscaping and maintenance.
Some of the other things that may fall under the HOA purview include removing snow, taking care of the pool as well as scheduling time to use common areas such as event rooms or clubhouses.
2020 Real Estate Market Values
As a budding real estate investor, one of the first questions that come to mind is whether or not 2020 is a great time to buy a home. To provide the most accurate answer to this question, we need to look at the current trends or predictions of the real estate market.
The year started on a high note thanks to soaring market prices, reduced mortgage rates, and an explicit seller’s market. Towards the end of 2019, mortgage rates were set to increase to 5.8%, but this shouldn’t be a deal-breaker because it’s at an all-time low.
It’s glass half full or empty situations; on the one hand, sky-high mortgage rates deter home buyers from buying while on the other they’re effectively eliminating competition in the property market. That said, real estate market prices are expected to stay the same or drop thanks to a decline in the number of buyers.
Is Buying a Townhouse a Good Investment? The Pros
- Reduced costs and better financing: one of the most significant financial benefits of investing in a townhouse for rental purposes is the overall cost of owning and maintaining one. Compared to a single-family home, the costs of owning and maintaining a rowhouse are considerably lower, making it an excellent option for those working with a tight budget. While the cost of maintenance might seem like a disadvantage at first glance, they’re not. That’s because it absolves you of the responsibility of taking care of expensive and labor-intensive maintenance around the property. This means that tenants can access amenities, all of which are maintained by the HOA. That said, the responsibility of maintaining the exterior and interior of the unit lies with the owner. What’s more, depending on which suburb the townhouse is, you might be eligible for a 90% LVR if you’re buying to own or 85% LVR for if you’re buying as an investment.
- Minimal maintenance: In most cases, townhouse owners are subject to a monthly maintenance fee that goes to the HOA towards caring and maintaining for the entire complex. As we mentioned earlier, while the association is responsible for a significant percentage of maintenance, some of these responsibilities fall back on the owner. Some of the duties of the HOA include taking care of dog parks, scheduling time for recreational halls as well as caring for other communal areas. They may also be responsible for maintaining the lawn, roof, and pool; however, more often than not, these responsibilities fall under the owner’s purview.
- Location, location, location: one of the most common deal-breakers for investors or homeowners is the location of the property. Most townhouses are typically located in areas surrounded by a variety of amenities such as gyms, pools, golf courses, etc. as well as public infrastructure, including schools, transportation means, and so forth. Highlighting access to these facilities is a great marketing tactic for attracting potential tenants. What’s more, the proximity of townhouses to these and more amenities allows for tenants to lead the coveted “lock and leave” lifestyle. Additionally, if the location of the townhouse is in an area with growth potential, then it will appreciate or retain its value if history is any indicator. Moreover, because most townhouses are located in safe and secure environments, they help build a tight-knit community with plenty of opportunities for social interactions, all of which contribute to the rental or resale value of the property should the time come.
Is Buying a Townhouse a Good Investment? The Cons
- High upfront costs: one of the main downsides of buying a townhouse as an investor is the considerably high startup costs. Most homeowners or investors don’t have a ton of cash lying around, which means that they’ll have to get some sort of mortgage financing to buy a townhouse. That being said, it’s worth noting that townhouses come with their own set of limitations, which makes it difficult to get financing. This is because lending institutions find it difficult to appraise and classify townhouses accurately. More often than not, mortgage loan providers underwrite townhomes the same way they would condos, which significantly increases mortgage rates. That’s because condos usually have more restrictive and expensive mortgage financing options. When buying a townhouse in an area that’s chock-full of them, it’s essential to find a mortgage lender experienced, and one way of doing this is to find other townhome owners and ask them to give you a referral.
- Slow rate of appreciation: Contrary to popular belief, real estate investors don’t make all of their money from leasing out properties. The property’s resale value also plays a significant role in that equation, so be sure to remember that when shopping for a townhouse. That’s because as substantial an investment as purchasing a townhome is, it can be challenging to raise its value. Compared to detached single-family homes, townhomes rarely or slowly appreciate if at all, and that could end up harming your ROI when you decide to sell. Because of this, it’s essential to thoroughly research and review historical records on real estate appreciation, especially those of the community where the townhouse is located as well as other planned developments that have the potential of increasing its resale value. And don’t forget, being a strata-titled property, there’s always the possibility that owners of the other properties in that complex could sell their units below market prices, which could end up reducing the resale value.
- Exorbitant HOA fees: Most townhouses typically have a homeowners’ association or HOA, which provides a variety of luxurious amenities. These include everything from libraries, clubhouses, playgrounds, tennis courts, hot tubs, saunas, community gyms, swimming pools, etc. and in some cases, HOAs are also responsible for maintaining the exterior of your townhouse and the lawn. The costs of which can run into hundreds of dollars each month. That said, it’s not uncommon for HOAs to ask homeowners as well as investors to chip in to help cover some of the major expenses such as upgrading security, repaving, etc. by charging them a quarterly fee in addition to their monthly contributions. What’s more, it’s not unheard of for HOAs to charge special fees to cover out-of-pocket expenses such as emergency repairs, legal fees, etc.
Related: When Will It Be a Buyers’ Market?
With homes in prime neighborhoods going at a premium rate, townhouses provide a unique opportunity for investors to get a piece of the action in an ever-growing real estate market.
They are an attractive option for both investors and homeowners looking for a middle ground between condos and single-family homes. Townhomes give homeowners the feeling of owning a single-family home in a modernized prime center.
Like every other investment vehicle, townhouses have their own set of advantages and disadvantages, so it’s essential to do your research before buying one.
So, is buying a townhouse a good investment? Well, if you’re able to find the right townhouse in an area with incredible growth potential, then it can be a worthwhile investment. Check out Zumbly today to find the perfect townhouse for you.