As an investor, you are always looking for the best rental property investments. Single-family homes dominate the investor landscape, but the underappreciated townhouse may be worth a look.
Townhouses can make good rental properties because they are more affordable than single-family homes, but they offer privacy and a lifestyle that's nearly on par with them.
This means you can attract tenants who are looking for the freedom and privacy of a single-family home but don't want to pay the high rent that comes with it.
But townhouses carry a unique set of costs and risks that you should understand before buying. They include HOA fees, homeowners association rules and restrictions, and special assessments that may be charged to cover association expenses.
This article discusses the pros and cons of townhouse investing to help you decide whether it’s right for you.
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What is a Townhouse?
A townhouse is a multi-floor dwelling that shares a wall (or two) with another townhouse in the building. You will have at least one connected neighbor who is next to you, but you will not have anyone living above or below you.
You own the land underneath your townhouse and are responsible for exterior maintenance as well as your roof.
People often confuse condos with townhouses, so here are the key differences:
Owns Underlying Land
Usually includes interior, exterior, roof and yard
Usually includes only interior
Tend to be higher than condos
Tend to be lower than townhouses
HOA fees tend to be lower
HOA fees tend to be higher
Have neighbors next to them
Have neighbors next to them and above/below them
Note: Certain communities may allocate responsibilities differently between the homeowner and the homeowner’s association, so there could be variations in terms of who pays for what.
Townhouses come in many varieties and price points, from very cheap rowhouses in urban areas to huge dwellings that rival single-family homes in more suburban settings.
With that introduction out of the way, let’s get into why townhouses can make good rental properties.
What are the Benefits of Investing In Townhouses?
Townhouses Are Affordable
Townhouses tend to be less expensive than single-family homes. This may be one of the key benefits of investing in townhouses.
This affordability makes it much easier for a beginning investor to save the down payment to buy a townhouse. You can also grow your rental property portfolio faster by buying townhouses.
Now I recognize that even with the lower price point, getting that down payment can be a challenge.
If you need help getting that down payment in place, I have a ton of great tips on how to set up the right account, jump start your savings (with basically no effort), and keep the savings rolling with passive income streams that actually work and don’t require any money or knowledge to set up.
Check out my article on how to start investing in rental properties to learn all of those tips (and more).
Townhouses Can Cash Flow
A townhouse’s affordability leads directly to its ability to cash flow better. Cash flow is money remaining from your rental payment after all expenses are paid.
Positive cash flow is one of the hallmarks of a good rental property.
Since the mortgage is usually smaller on a lower-priced property, you have an easier time getting positive cash flow. If you want to see an illustration of how this principle works using real-life numbers, check out my article on condo investing.
So how can you tell if your target townhouse will actually cash flow?
First, you need to figure out the expected rent. There is no method to perfectly predict expected rent, but a great place to start is with your real estate agent.
Your agent can pull for you “rental comps” which are basically a history of rentals in the area that are similar to your target property. You can get a pretty good sense of the rent your property will support based on those comps.
Another option is to go to Zillow’s “Rent” tab and run a search of the property’s ZIP code. The results may include rental listings for properties that are similar to yours in size, bedrooms, etc. If your townhouse is part of a community, even better. You can look for townhouse rentals like yours that are in that community and see what they are charging for rent.
Of course, if you want a ready-made solution to this, you can use Mashvisor. They include rental comps as part of their service, plus a lot of other helpful features to analyze your rental investment.
Any of these methods (or all of them in combination) should give you a pretty accurate idea of your expected rent.
Your estimated expenses should be much easier to calculate.
They are going to include your mortgage payment, property tax, and property insurance all of which generally rolled into a single payment that you make to the lender. If your townhouse is part of an HOA, you may also have HOA fees.
Again, if you go to Zillow, they can provide an estimate of this for any property you type in.
Just subtract your estimated expenses from your expected rents. If it's a positive number, you have positive cash flow.
Townhouses Appreciate in Value (But With a Caveat)
Townhouses, like other forms of real estate, tend to appreciate over time. But a common criticism is that they appreciate less than single-family homes or other types of real estate.
Regardless of overall trends, the value of a specific property is going to be governed by supply and demand and a lot of it will depend on the condition of the local market and the desirability of the particular townhouse.
If a townhouse is in a great location and the lifestyle afforded by that townhouse is coveted by buyers in that area, it will go up in price. If it’s poorly located, in terrible condition, or has other flaws, the value of that townhouse could flatline or even decline.
If you want a better sense of how your townhouse may appreciate, Zillow can be a great resource. When you pull up a given property, it includes a graph showing how Zestimates have gone up or down for that property over time.
You can also get past sales info for that property. This will give you concrete numbers on what the property sold for in the past. You can compare that to what it is worth today and get a sense of how the property has appreciated over time.
If you are working with a real estate agent, they also have access to past sales data for your target property and other townhouses in the community (called sales comps). This can also show you how prices have climbed (or not) over time for your property and similar properties.
Townhouses Offer Tenants Privacy and Freedom
Townhouses can offer superior privacy when compared to condos. They tend to be less packed together than condos and, as mentioned before, townhouses don’t have units above or below them.
That is a really important benefit for tenants that have young kids. They do not have to worry about disturbing their neighbors if their kids run around the house.
And because of this, you as a landlord get far fewer noise complaints.
Also, because the HOA doesn't own the yard, your tenants can have the freedom to do things like grilling in the backyard, which is often banned for tenants living in condos.
All of this leads to a better tenant experience and less vacancy, which ultimately leads to more profit for you.
Basically, you are getting many of the advantages of owning a single-family house, but with a lower purchase price and fewer maintenance hassles. On that note, let's talk about maintenance.
Townhouses Need Less Maintenance
Townhouse owners generally have smaller yards and at least one shared wall, so there is less yard maintenance and less exterior maintenance when compared to a single-family house. Of course, condos are even better when it comes to reduced maintenance.
But if you want a nice balance between maintenance responsibilities and freedom, the townhouse is a good choice. You own more, so you are responsible for more, but you also can do more – or more importantly, allow your tenants to do more.
Shared Benefits of Rental Property Investing
I have focused on benefits that are unique to townhouses vs. other dwelling types, but townhouses also have additional benefits that are shared across housing types. They include tax breaks, better returns through leverage, and the fact that your mortgage is being paid down by your tenants.
If you want to learn more about these (and other) benefits of rental property investing, check out my article on this topic.
What are the Drawbacks of Townhouse Investing?
The biggest drawbacks of investing in townhouses include HOA fees, special assessments, association rules that may limit rental activity, and potentially less appreciation when compared to other property types.
Many Townhouses Have HOA Fees
Many townhouses are part of a homeowner’s association (HOA). It is not as universal as it is for condos (where they are always part of an HOA).
If your townhouse is part of an HOA, you must pay HOA fees to the association to cover the cost of maintaining common areas, and the community in general.
Obviously, these fees eat into your cash flow and profitability.
But because HOAs don’t cover as much of the maintenance costs for townhouses (as compared to condos), your HOA fee is usually less than a condo HOA fee.
But I don’t view HOA fees as sunk costs. These fees are used to keep the community looking good and sustaining property values. Also, the fees are used to build reserves against large expenses associated with replacing parking lots, pools, and other amenities that may be offered by the community.
Word of Caution: The association may also require owners to pay special assessments if the association needs to pay for a large expenditure. In an ideal situation, the association should have been reserving for such large expenses, but that does not always happen.
You should carefully examine the association documents before you buy to figure out if their reserves are adequate.
Townhouses May Have Association Rules
As mentioned above, you should carefully read the townhouse association documents, including the covenants, conditions, and restrictions (CCRs for short). Watch out for any limitations on renting out your unit. Some associations allow you to rent the unit but impose lease requirements that you may not like.
While the association rules can work in your favor by preventing unwanted behavior by your tenants and other residents, they can also cut against you.
Bottom line – carefully read the CCRs to understand what you are signing up for and whether they conflict with your investment goals.
Townhouses May Appreciate Less
I touched on this earlier, so I won't belabor the point. It's a common gripe among investors that townhouses don't appreciate as much as other property types. I couldn't find any hard evidence to support that (just a lot of people saying it's true), but it may exist.
That being said, I think the best course is to evaluate your property on a case-by-case basis as I discussed earlier.
If you are looking to buy a rental property that offers land ownership and the freedom that comes with it, but don’t want to pay the high price for a single-family home, a townhouse may be the right fit for you.
They can give your tenants a fairly private lifestyle that mimics single-family home living, but with an affordable rent payment. That sort of sweet spot can make your tenants happy, which can translate into profit for you.