First time home buyers may consider buying townhomes instead of single homes due to the less-intensive maintenance. However, the question is do townhomes retain their values? The short answer is yes, townhomes most certainly retain their value. But new investors need to understand certain key differences between townhomes and single-family, standalone houses.
In other words, people looking to purchase a rental property – but with less management responsibility – often view townhomes as a good compromise. However, these same people want to ensure that their investments continue to retain their value (and, ideally appreciate) in the long run.
In this article, I’ll discuss some of the key considerations investors should understand before investing in townhomes. Specifically, I’ll dive into each of the following topics:
- Townhomes, Defined
- Do Townhomes Retain Their Value?
- Factors That Affect the Value of Townhomes
- Are Townhomes Good Investments?
- Townhome Pros and Cons
- Is Investing in Townhomes Right for You?
What is a Townhome?
People use the term townhome frequently, but I’d like to first define this property type, as some misconceptions exist.
Townhomes have multi-floor layouts that share one or two walls with neighboring properties. However, unlike apartments of the same type, townhomes also have their own entrances from outside, providing a greater level of privacy.
In general, developers build townhome communities, with each property – though distinct – fairly uniform, both in terms of exterior appearance and interior layout. And, within these communities, homeowners’ associations, or HOAs, typically exist to address common-area maintenance and community-wide concerns.
Do Townhomes Retain Their Value?
Okay, now that I’ve provided an overview of townhomes, the question remains, do they retain their value?
To answer this question, it helps to view it through the lens of the largest real estate crash most of us have faced – the 2008 crash in property values that went hand-in-hand with the Great Recession.
We learned some great – though hard – lessons during this time. With respect to residential properties, property values, in addition to tracking local markets, broadly tracked property type. Here are the major takeaways:
- High-end homes, vacation homes, and townhomes: All of these property types collapsed in value first, and they’ve all faced the slowest property appreciation rates during the post-Great Recession recovery period.
- Townhomes, specifically: While these properties declined in value first, they also have now mostly recovered due to typically falling within median price ranges in local markets (as opposed to vacation and high-end homes, priced higher and in many markets still trying to claw back to pre-2008 highs).
- Standalone, single-family homes: These properties retained value – and appreciated – far more effectively during the 2008 crash and subsequent recovery than their higher-cost and townhome peers.
So, what’s the big takeaway for investors looking at townhomes? Yes, townhomes will retain value in the long term, but they’ll face more valuation volatility than single-family homes – decreasing in value faster and taking longer to fully recover.
Factors That Affect the Value of Townhomes
After discussing the broader macroeconomic trends that affect the value of townhomes, investors should also understand how the specific property type affects value.
With townhomes, you can’t do much to add value externally. As newer townhomes typically have HOAs, these associations mandate certain levels of external uniformity. Essentially, an association wants to retain value across the entire community, and in doing so they restrict individual owners’ ability to do much of anything to improve a townhome’s exterior.
Additionally, owners have limited ability to add value internally due to floor plan uniformity across a community. Essentially, townhome owners compete against the largely identical properties of their neighbors.
Put simply, when it comes to a townhome, owners can’t do much individually to add value. Put simply, when it comes to a townhome, it is what it is, for better or worse.
Are Townhomes Good Investments?
When it comes to townhomes as investment properties, what do you think?
Well, I’m going to have to answer this with an it depends. Specifically, it depends on your investment strategy:
- Fix-and-flip with a townhome: In this scenario, investors typically buy, rehab, and sell a property more quickly than it can decrease significantly in value due to market-related factors. As such, the more volatile nature of a townhome becomes moot.
- Long-term buy-and-hold with a townhome: For a different reason than the above, this strategy works with townhomes, as well. As long as you have the staying power and discipline to hold your property through the inevitable ups and downs townhomes face, you’ll experience long-term property appreciation.
However, regardless of which of the above strategies an investor chooses, he or she still needs to ensure that it’s a good deal, townhome or not.
At The Investor's Edge, we analyze all of our deals with our Investor’s Edge software, which provides us the analytical support to confidently assess a deal, deciding whether or not to pull the trigger.
Townhome Pros and Cons
Additionally, investors should understand some of the broader pros and cons of townhomes prior to purchasing their first investment properties:
Pros
- Cost: Due to their shared walls and maintenance, townhomes are typically less expensive than single-family homes, an often appealing reality for new investors.
- Maintenance benefits: The smaller size (fewer interior maintenance needs) and HOA duties (fewer exterior maintenance needs) combine to significantly minimize the maintenance requirements inherent to townhomes.
- Amenities: As properties within a broader community, townhomes often share common amenities (e.g. swimming pools, fitness centers, playgrounds, etc) that can prove appealing to potential tenants. And, depending on the market, these amenities may justify increases in rent over comparable properties without them.
Cons
- HOA fees: While a HOA will typically handle exterior and common-area maintenance, owners pay for this service. As such, in calculating their monthly cash flow, owners of townhome investment properties need to factor this payment in with their other fixed costs. However, townhome landlords can pass this fee on to their tenants as they would with other utilities.
- Noise due to shared walls: Sharing two walls with neighbors has the potential to cause some serious noise pollution, something all potential townhome investors should ask about in their target community.
- Multi-floor living: Having laundry on the first floor, living room and kitchen on a second floor, and bedrooms on a third may not be for everyone. Specifically, for older people or anyone with medical conditions, this multi-floor set-up may not work.
Is Investing in Townhomes Right for You?
Having outlined the above, people need to ask whether investing in townhomes makes sense for their specific situations.
If you’re considering a fix-and-flip strategy, you’ll likely own a townhome for a short enough period to avoid its inherent volatility. Additionally, if you have the staying power and discipline to pursue a long-term buy-and-hold strategy with a townhome, this property type works, as well, due to the long-term property appreciation they experience. And, this latter approach with townhomes also has the potential to minimize the inevitable maintenance requirements faced over a property’s lifetime.
But, I want to leave you with some final thoughts. First, prior to any townhome purchase, make sure you read cover-to-cover the HOA rules and regulations, as some communities have owner-occupancy percentage requirements that can derail a rental strategy. Second, talk to your future neighbors. If the HOA has any major problems, they’ll be the best people to ask for details.
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