If you are new to real estate investing, you may not be sure what types of property to purchase. Especially if you are a first time home buyer, you may be interested in townhomes as less maintenance is required. Another important question you need to ask is this: “Are townhomes hard to sell?” The short answer is maybe, townhomes may be hard to sell. This is mainly due to the limitations that townhomes have. In fact, I’m usually an advocate for holding onto townhomes and renting them out instead of selling.
In this article, I’ll cover the following topics to help you understand the pros and cons of investing in townhomes:
- Why can townhomes be hard to sell?
- Pros and cons of investing in townhomes
- The best strategy for investing in townhomes
Why townhomes are hard to sell
Townhomes are a type of property that usually share walls with other houses, but each home is individually owned. Townhomes are typically seen as inferior to single family homes and often aren’t as valuable.
Here are some of the reasons you might not be able to get as good a price when reselling one.
Townhomes are less desirable on the market
Townhomes are between condos and single homes, as you can own the entire house typically with 2 floors, but still share walls with your neighbors. For this reason, townhomes actually share some of the disadvantages of both properties.
For example, usually a family will be looking to buy a single home so they have a yard and fence for their kids and dogs. Young couples or singles often want to live in a condo that has nice facilities in a downtown neighborhood, and are usually cheaper than townhomes. Comparatively, there are less buyers on the market that prefer a townhome.
Competition in the neighborhood
It can be harder to sell a townhome than a single family house, and one of the main reasons is because of the competition with other similar homes in that area. As all homes in the same community have the exact same square footage, floor plan and location, buyers will look at other homes for selling and compare the prices to avoid overpaying. If there’s a motivated seller in your neighborhood who cuts the price for a faster sale, you will have less chance to sell your house quickly.
On the other hand, you have a better chance to sell single homes at a higher price, as there are less immediate comparables on the market that have the exact same size and floor plan. You may have a chance to sell it at a better price because of a unique selling point for your property, such as your floor plan, decoration, or the nice yard.
Buyers may not get FHA loan approval to buy townhomes
Another issue you may have when selling your townhome is that if your buyer applies for an FHA loan (Federal Housing Administration), there is a risk that the buyer may not be able to get FHA approved to buy your townhome.
FHA loans are for lower or moderate income borrowers who may have lower than average credit score. FHA allows a lower down payment than conventional loans but FHA has requirements regarding properties to purchase.
A townhome must meet FHA’s minimum standards for property condition and local loan limit restrictions in order to qualify for an FHA loan. The home association, or HOA, must gain FHA approval to accept an FHA loan. Because there are properties FHA won’t lend, meaning the new buyers have to put 20% down payment, which makes it difficult to resell your townhome.
In this case, you need to make sure that the townhome you are getting is an FHA approved community. Otherwise, you need to be very careful when buying it as a long term hold property.
High HOA fee
Townhomes usually are managed by the HOA and they charge monthly fees. HOA fees usually range from $50-300 per month. Some communities have high HOA fees as well as transfer fees which may deter potential buyers.
Disadvantages of investing in townhomes
Other than difficult to sell, townhomes have disadvantages you will need to keep before investing in one.
The value of townhomes will be affected by your neighbors
As there usually are several units with the exact same floor plan in a community, one townhome’s value will be influenced by other properties in the community. You need to make sure to protect yourself when bad things happen in the community.
For example, once a bank forecloses a townhome in that neighborhood, the house value of the whole community tends to drop. So you’re going to have problems with appraisals of your townhome, because appraisals compare the properties in your neighborhood to decide the house value. Here is a detailed article about the influence of foreclosure in your neighborhood on your property.
Limited forced appreciation
Forced appreciation in real estate investment refers to increasing the house value actively by upgrading the house, such as repairs, updating, or remodeling. It is one of the most common real estate investment strategies that investors use to make a profit, no matter how the house market changes.
With a single home, you can get a bigger house value lift by adding values to your home. However, you can’t do too much for your townhome due to HOA rules. For example, often you can’t update the exterior, you can’t plant nice trees or improve landscaping in your yard, so you can’t add value to your home. All you can do is inside your home. Overall, townhomes may not appreciate that much in value compared to single homes.
It’s also easy to overbuild your neighborhood. If you add lots of upgrades and try to sell your townhome for an extra $50k, buyers will simply look at the other townhomes for sale in the neighborhood.
Limited options for types of homes
Typically when you’re dealing with a residential neighborhood, you’re going to have homes of different shapes and sizes. You have options such as bigger or smaller homes, or from 3 bedrooms to 5 bedrooms.
But when you deal with townhomes, there are just a couple of floor plans. Typically a townhome has two or three bedrooms, and are built on one or two floor plans. You don’t have many options regarding the type of homes.
Best strategy to invest in townhomes: rental properties
Townhome can be a good investment if you have the right strategies. At the very least, townhomes can be a good investment for rental properties. HOAs typically take care of the outside maintenance, saving you the trouble. They often take care of the roof, the exterior, and yard, so you only need to take care of the inside.
If you are looking to invest in townhomes, I think using those as rental properties is one of the better ways to invest because the HOA cuts down on the maintenance that you have. However, you do have to pay a HOA fee for maintenance like the snow removal, the exterior, and the clubhouse.
When renting out your townhome, I typically pass along the HOA fees or at least the water, sewer, and garbage bills to the tenant. If I’m renting my townhome for $1,100, in addition to that there’s a $100 fee for water, sewer, garbage, trash removal that should be paid by my tenants.
As a real estate investor, I prefer buying single homes over townhomes. But if you decide to buy a townhome, I suggest to use it as a rental property instead of doing any kind of fix & flip or upgrade.
If you’re looking to fix & flip or wholesale a townhouse, just be prepared that house values can fluctuate depending on what happens in the area such as a foreclosure. Understanding the pros and cons of townhomes, is essential before you get started.