5 Reasons Townhomes Are Good Investments For a First Rental Property

Should I Invest In a Townhome As My First Rental Property?

With many property types to choose from, it's no surprise townhomes are rising as popular options for investors and tenants alike. Although many people look for a single-family home to buy, renters often prefer something smaller with many of the same benefits. A townhome is an ideal choice to achieve these goals.

Townhomes are usually more affordable and easier for property owners and tenants to maintain. They provide excellent amenities, like a community swimming pool or fitness center. By comparing the following factors, investors can make a decision that will suit their goals.

Townhomes Cost Less Than Single-Family Homes

Generally, townhomes cost less than single-family homes in the same area. As a denser form of housing, developers can often fit more townhome units than single-family homes in the same amount of space. As such, they can list townhomes for a lower price while making a reasonable return on investment (ROI). For investors looking for more affordable options, townhomes may be easier to buy at a lower asking price, increasing their potential profits.

Finding the right home to buy as an investment involves an evaluation of ROI. Investors need to find properties that fill the following criteria:

  • Cost less than the investor's maximum ability to buy
  • Offer reasonable rental income for the home in relation to the list price
  • Are likely to attract reliable tenants

Investing in townhomes can be a good way for people to get started in real estate investment or expand into different locales.

Townhomes are more commonly built in areas with a denser population, closer to downtowns. They are also a popular home type in places with a lot of recent economic and job growth. These factors can increase the investor's potential for a good ROI.

Townhomes Often Come With Increased Security & Great Amenities

The fact that a townhome unit shares at least one wall with a neighbor is a benefit of improved security. Several people living within the same area increases the likelihood that a neighbor may notice something wrong and alert the right resident. Common areas surrounding a townhome building may also be more secure because more people use the property at any given hour.

For investors, townhomes can be a significant selling point to prospective tenants, particularly if they have excellent amenities. A homeowner's association commonly manages townhomes. The HOA may choose to offer several amenities and services available to residents, including:

  • Property-wide Wi-Fi access
  • Office services
  • Clubhouse for event rental
  • Swimming pools
  • Fitness centers
  • Entertainment spaces

Townhomes with these amenities can command higher rental prices, leading to a better ROI for the investor.

Leverage FHA Mortgage Benefits

Use FHA Loans for Your Townhome Investment

Although many government-backed mortgage programs are designed for consumers, there are approaches investors can use to leverage these opportunities. For example, FHA loans are intended for primary residences, but there is some flexibility to this definition. Specifically, people can get an FHA loan for an investment property, such as a two-unit duplex or a four-unit townhome. To qualify for the loan, investors would need to meet the loan requirements and plan to occupy at least one of the units as a primary residence for a certain period.

Outside these specific situations, investors may be able to use FHA loans to jumpstart their investing careers. Generally, people who use an FHA loan to buy a townhome must live in it as a primary residence for at least one year before they can sell it. Within those limits, investors still have several options to consider. For example, an investor could buy a townhome and live in it for a year while making renovations.

Once those renovations are complete, they could purchase another townhome as a residence and rent out the first one. Some townhomes are large enough that investors could consider dividing the unit to create a living space for a tenant while they still occupy it as a resident.

Townhomes vs. Single-Family Homes: Why Choose Townhomes

Townhomes often offer a better return for investors because they appeal to a broader audience. Single-family homes come in various sizes and styles. In areas where single-family homes are larger and more expensive, it may be more difficult for an investor to get a good ROI if the average rent does not accommodate the higher price.

By comparison, townhomes usually have a smaller footprint and a lower list price. Most renters are interested in smaller units than homes with several bedrooms. As such, townhomes often have a larger pool of prospective tenants.

In addition to a lower cost to buy the property, townhomes usually require less money to operate and maintain. However, townhomes may have HOA fees for maintenance and upkeep of the building exterior and outside property. Single-family homes can require as much or more of an investment by a property owner to maintain the yard and occasionally update the home and property as needed. Even with monthly HOA fees, investors may find that keeping a townhome ready for tenants takes less time and money.

Townhomes vs. Condos: Why Choose Townhomes

Although condos offer investors many benefits, townhomes may outweigh them in several ways. The difference between a townhome and a condo is that condos typically keep the entire unit to one floor in a larger building, while a townhome is a vertical piece of the building. Townhome owners may own the land underneath the house, which usually gives them more freedom to manage aspects of the property. Townhomes only have one or two neighbors, while condo residents may have several. Those who want more privacy and decision-making over their outdoor living spaces are more likely to choose a townhome.

Townhomes can be a more appealing option for tenants, as well. Condos are the most affordable investment housing, meaning more condo units are likely to be tenant-occupied. Large buildings with frequent tenant turnover appeal to a smaller audience, especially those looking to rent a home for several years. In exchange for buying a townhome, investors can benefit from higher rental and ownership rates for the building.

Make an Educated Choice About Your Next Investment Property

When investors consider their options for a rental property, townhomes should rank highly in the evaluation. Townhomes cost less than single-family homes but offer many features tenants find preferable to a condo. In many ways, townhomes make it easier for investors just starting with real estate because they are less expensive to buy and require less maintenance than a single-family home. Considering these factors, investors will easily find the right investment property.

Middlesex County Townhouse Resources

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