Are Townhouses Considered a Good Investment?

There are many ways to invest in property, and it may be a more accessible enterprise than you think. As well as investing in physical condos and studios, there’s also the option to invest in a real estate investment trust (REIT), for example, or to make money by ‘flipping’ properties. The latter entails buying a property and renovating it on an extremely tight timescale, then selling it quickly to make maximum profit.

However, when most people think about investing in this market, they think about brick-and-mortar properties. Townhouses are often considered to be a good choice as they’re generally less expensive than detached properties, and ownership may come with access to amenities such as a fitness club or swimming pool.

What is a Townhouse?

While townhouses tend to share certain features, such as being multilevel, attached to other properties, and narrow, this can be confusing as multilevel attached properties can also form part of some condo communities.

What actually defines a townhouse is ownership. In most cases, townhouse owners hold ownership of the land their property sits on, including the existing front and backyard spaces (where they exist) and the property’s exterior. However, fees are usually payable to the relevant Homeowners Association for maintaining communal areas and any amenities present.

While townhouses can be found in every state, as the name suggests, they’re mostly located in cities, especially in areas where building land is in short supply, and property prices are high.

Do Townhouses Tend to Go Up in Value?

Firstly, potential buyers need to be aware that the difference in the price of townhouses varies hugely from state to state. How much are townhouses? Well, the average townhouse in California is around the $700,000 mark, whereas in Wisconsin, you’d have a good chance of picking up a townhouse for about $350,000.

In general, townhouses retain their value in the long run. It’s important to note, though, that if the property market dips, townhouses tend to decrease in value quicker than other types of family homes, and their value can take longer to recover. However, this type of property type is well-known for its ability to recover and consistently regain its former value.

Do Townhomes Appreciate in Value?

Compared to other property types, townhomes don’t tend to enjoy a great rate of appreciation. But, as mentioned above, they do tend to consistently regain their value after a market slump. While, therefore, townhomes may not be the best investment in terms of making an end profit on the sale, they are potentially an effective way of providing you with an extra income stream as a rental property.

What are the Pros and Cons of Investing in a Townhouse?

Pros

• Generally cheaper to buy than a detached house.
• Tend to ultimately keep their value and recover if the market falls.
• Added luxury of amenities.
• Private entrance and (if existing) backyard.
• Sense of community for your tenants.
• Usually within easy commuting distance of town or city center.
• The HOA will usually take care of the maintenance of communal areas.

Cons

• Will likely be liable for HOA fees.
• Need to abide by HOA rules.
• Lack of storage space and potential noise from neighbors may be a dealbreaker for tenants.

What to Look for in a Townhouse

When it comes to investing in a townhouse, there are three key considerations: location, whether the HOA is well-run, and the ratio of renters to owners in the neighborhood. For those still debating ‘is a townhouse a good investment?’ It's important to be aware that the three elements below can help you determine just how good - or otherwise - an investment the property you are considering is.

The Location

It really is all about location! Think about what your prospective tenants are likely to be drawn to: what is the local community like, for example, what are the nature of the transport links, is the property near a park or other green space? 

Conduct as much research as possible into the area and find out whether any new developments are pending or possibly on the horizon that could have an impact on the property’s value.

Location will also be a major determinant of price. For example, those reasonably-priced townhouses in Wisconsin? You could pay four times as much for the same floor space in a townhouse in Manhattan.

The HOA

It’s not just the fee payable to the HOA you’ll need to consider when choosing a townhouse. It’s vital, too, to discover how well-run the HOA is and the level and nature of the maintenance work it undertakes. A visit to the site should give you a good idea of how well-kept the communal areas and amenities are.

As part of your research, check out the rules and regulations set by the HOA and how it handles incidents of non-compliance. It’s worth finding out as HOAs may not just stop at imposing fines: some organizations stipulate that non-compliance with regulations can result in liens being taken out on the home or even the foreclosure of the property.

The Ratio of Renters to Owners

This is an extra way of finding out how desirable, in general, both the property and the neighborhood are. If there are significantly more owners in a neighborhood than renters, this usually indicates that it’s a desirable place to live.

Can You Rent Out a Townhouse?
Yes, in most cases, you will be able to rent out a townhouse. The only fly in the ointment could be if your HOA has rules in place regarding short-term rentals, so check the agreement carefully before signing on the dotted line if this is the renting route you wish to go down.

What to Consider When Renting Out a Townhouse

Potential Rent Amount

Once you’ve got the townhouse looking its best, determine the amount of rent you’ll charge tenants. To help calculate this, take into account the following:

• What rent are similar properties charging in the area?
• The value of the townhouse.
• Market demand.
• The costs you’ll incur in renting out the property.
• Parking facilities.
• The overall safety of the neighborhood.
• The nature of the amenities.
• The proximity of nearby schools, public transport, etc.

Some states have rent controls in place, which mainly limit how much a landlord can increase the rent payable by existing tenants, so be aware of these regulations if you are within a state where they are in place.

Setting a Maintenance Schedule

While the communal areas and amenities may fall under the remit of the HOA, the property itself and any land which comes with it fall to you, as the landlord, to maintain. This could include things like arranging for smoke detectors to be inspected regularly and replaced if necessary and promptly replacing tiles that have fallen from the roof.

It’s a great idea to draw up a maintenance schedule, which details all of the tasks, checks, and work you’ll need to undertake throughout the year.

Take Out Landlord’s Insurance

Having a landlord insurance policy in place is vital to protect your property, your tenants, and your peace of mind. Typically, landlord insurance covers damage caused by disasters such as fire, wind, hail, lightning, and electricity/gas malfunctions. Plans can also provide liability insurance in the event that someone is injured on your rental property.

Importantly, landlord insurance can also cover your loss of business income should your rental townhouse become temporarily uninhabitable.

Key Takeaways

If you’re considering buying a townhouse to rent out, this could be a great long-term investment, but there are some crucial things to consider:

1. The location
2. The state of the market, locally and nationally
3. Future developments that could affect the property’s value.
4. The role of and the fees that are chargeable to the HOA.

Once you’re ready to begin renting out your townhouse, it’s important to:

1. Set the rent at a rate that reflects market value.
2. Create a maintenance schedule to ensure you fulfill all your obligations as a landlord.
3. Take out landlord insurance to ensure you have the coverage you need.