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 keep their value. But new investors need to understand specific key differences between townhomes and single-family, standalone houses.
In other words, people looking to purchase a rental property often view townhomes as a good starting point. However, these same people want to ensure that their investments continue to retain their value (and appreciate) in the long run.
What Is A Townhome?
People use the term townhome frequently, but I’d like first to define this property type, as some misconceptions exist.
Townhomes have multi-floor layouts that share one or two walls with neighbouring properties. However, unlike apartments of the same type, townhomes also have entrances outside, providing a greater privacy level.
In general, developers build townhome communities, with each property relatively uniform, both in exterior appearance and interior layout. Within these communities, homeowners’ associations, or HOAs, typically address common-area maintenance and community-wide concerns. Check out our range of dual occupancy builder for your dream house.
What Does An Excellent Townhouse Look Like?
Townhouses have the most appeal when they are bright, spacious and modern. Location is crucial –everyday conveniences should be nearby. If you are looking for solid capital growth and tenant appeal, look for a townhouse that is only a short walk from everything a potential tenant would need – good local retail, public transport options and local parks.
When it comes to design, a well-built townhouse makes the most of natural light. They may have neighbours on two sides with windows only at the front and rear – but this doesn’t mean they have to be dark and gloomy. A well-designed townhouse is sensitive to its aspect and neighbours, capturing natural light from different angles through floor-to-ceiling sliding doors or skylights.
Though they’re smaller than houses, townhomes should never feel cramped or be lacking in storage. There should be space to move between living and dining areas and ample storage freely. When buying a townhouse, check the floorplan for built-in robes, sizeable pantries, and plenty of storage space suitable for bikes or sports equipment.
Do Townhomes Retain Their Value?
When compared to typical detached, single-family homes, townhouses are usually cheaper. A townhouse’s relatively lower value makes this property type a popular option among first-time buyers and buyers with otherwise limited budgets or means. Due to the lack of yard or lot space, a new townhouse’s value may even be lower than that of an older, similar-sized single-family house. Townhouses share structural features, such as walls, roofs, fences and yards; therefore, an individual unit’s value retention dramatically relies on its location and the entire property’s overall upkeep.
As with most housing types, a townhouse’s distance from a city’s core — where employment opportunities are usually most excellent — matters. The most dramatic declines in home values occur in the suburbs and distant communities where new construction flourished during a housing boom. A lack of employment opportunities in these areas renders them fiscally vulnerable to housing downturns, as owners must travel further and spend more money to get to work. This leads to a decreased demand and lower values. When compared to nearby homes, a townhouse with a prime location will also retain its value better. For example, waterfront townhouses and those with views of golf courses or other scenic landscapes fetch higher sale prices.
Neighbourhoods with high-performing public schools and residents with relatively higher educational levels fare better during tough economic times. Greater demand for housing in such areas supports higher property values for townhouses as well. By contrast, townhouses located in neighbourhoods with low-achieving schools and residents who have attained lower levels of education have a more challenging time retaining value during housing slumps, according to Realtor.com.
Townhouses are typically located within planned communities and run by homeowner’s associations. A townhouse HOA helps retain property values by creating and enforcing rules which keep the community’s appearance and amenities up to standard. For example, townhouse communities usually restrict owners from selecting unusual exterior paint colours or letting their yards grow wild. When adequately run and financed, an HOA preserves overall values. Owners pay monthly dues to cover operating expenses such as security, common-area maintenance and repairs and upgrades for shared structural components.
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 & flip with a townhome: In this scenario, investors typically buy, rehab, and sell a property fast enough that market-related factors usually aren’t an issue. The property may drop a bit in value, but you’re likely to experience a complete crash in the few months you’re rehabbing it. As such, the more volatile nature of a townhome becomes less of an issue.
- Long-term buy-and-hold with a townhome: 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, they still need to ensure that it’s a good deal, townhome or not.
Townhome Pros and Cons
Additionally, investors should understand some of the broader pros and cons of townhomes before purchasing their first investment properties:
- Cost: Due to their shared walls and maintenance, townhomes are typically less expensive than single-family homes, an appealing reality for new investors.
- Maintenance benefits: The smaller size (fewer interior maintenance needs) and HOA duties (more occasional exterior maintenance needs) combine to minimize the maintenance requirements inherent to townhomes significantly.
- Amenities: As properties within a broader community, townhomes often share standard amenities (e.g. swimming pools, fitness centres, 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.
- HOA fees: While an HOA will typically handle exterior and common-area maintenance, owners pay for this service. That means when 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 neighbours can cause severe 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, especially older people or anyone with medical conditions.
What To Consider Before Buying A Townhouse?
Contracts and loans for townhouses
Whilst a standard, the single-part contract is still the most common type for a new townhouse property, and split contracts are becoming more popular with developers. This is where the land purchase is on one contract and the construction of the property on another. The pros for the purchaser are that you need only pay stamp duty on the land. However, hold costs during the build period need to be considered. The finance process of split contracts can be tricky, so it is essential to ensure you’ve got a good mortgage broker familiar with these types of arrangements before proceeding.
Community facilities and fees
One of the perks of some new townhouses is the excellent community facilities on offer like parks, playgrounds, BBQs, firepits or pools. These add appeal to townhouse developments and create a sense of community, with residents interacting in these common spaces. These features may have an impact on strata fees within a development. However, carefully managed strata-costs can result in very reasonable strata fees – and these features can add significant appeal resulting in more substantial rents and more strong resale values. Check what’s included with your townhouse and the associated strata or maintenance fees to look after it – these costs should be factored into your purchase decision.
Strata vs freehold title
Depending on the development, the townhouse could be under a strata, community or freehold title. Strata title is just as you would find with apartments, where strata fees are contributed to maintaining the buildings and townhouse estate. Under community title, each owner has full ownership of their lot and maintains communal facilities like pools, entertaining outdoor areas, BBQ areas, and playgrounds. Under a freehold title (also known as Torrens title), everyone owns their lot wholly, and there are no shared amenities. Before buying a townhouse, your solicitor will be able to explain which title your potential purchase falls under and the implications of each.
A checklist for choosing the best townhouse investment
- Local retail, parks, schooling and public transport links nearby
- The floorplan suits a range of household compositions like downsizers, families or young professionals
- The design lets in a lot of natural light to living spaces as well as bedrooms
- There’s plenty of storage space throughout – think built-in-robes, linen closets, and storage space within the garage
- What common facilities are within the development, and will this add value and appeal to tenants or owner-occupiers?
- The type of title (strata, community or freehold) suits your property investment needs.
How Buying A Townhouse Could Benefit You?
Value for money when buying a townhouse
Many developers and builders now aim to build townhouses with affordability to attract investment while also making the most of the land on which the developments sit. As an investor, while you should be vigilant by using a building surveyor to warn you of any structural issues of a property, such as thin walls that may have a negative effect on your resale price, townhouses often make the most of the land value by designing the property to have as much space and light as possible. Look out for common structural issues, such as water damage, bouncy flooring and cracks.
Second, townhouses can often be a relatively affordable way to enter the property market without sacrificing your location goals. They are usually located within the inner city. They often sell quickly. However, they may not experience the same capital growth that a freestanding property in the same area will.
Thirdly, demand for townhouses has often outstripped supply, and this is set to continue with neighbourhood pushback against medium/high-density living. This means existing and new townhouse owners can expect more incredible capital growth. For those buying an off-the-plan townhouse, be sure that you are aware that if it is a split contract, in which the land and construction are paid separately, will your lender finance both payments?
Many townhouses, especially those with two or more properties within a development, are often sold with a strata title. This means that you agree to purchase a portion of the entire development. Secondly, you agree to contribute the fees necessary to maintain the development as a whole. These fees, called body/owner corporation/strata fees, will increase with the more facilities your property has, such as a gym or pool.
The benefits of being a part of a strata corporation? You have more interaction with your neighbours (if you want it) and less physical work to manage your property’s surroundings and shared spaces. Townhouses often have lower strata fees than multi-storey tower developments as they have less work involved in their maintenance and more minor for you to worry about. Home Builders has the best range of dual occupancy builder services to help you create your dream house.
Tip: be sure to read over your strata title in detail. Be aware of what your fees cover and what the prices are in total, the frequency and extent to which they are increased, how issues are resolved and any upcoming expenses that could sneak up on you the second you move in.
Sure townhouses, especially those with more than two properties on the development, have increased security measures. It is in the strata corporation’s interest to maintain the development’s security, especially as far as its insurance policies are concerned. Be aware that the costs of securing your property will most likely be passed on to you via strata fees.
One size does not fit all.
Remember that there are a variety of strata-type townhouses in which to invest. Differing property types will suit a variety of investment strategies. Purchasing a townhouse as part of a two-property strata title will be different to investing in a 6-unit or multi-level building. Be sure to check what changes you can make regarding renovations—for instance, what walls and features are shared and part of the strata title.
Sometimes the larger the number of properties within a title, the smaller your individual strata payments will be. However, more significant titles may include amenities such as pools and gyms, as well as higher insurance costs that will inevitably be passed on to you. You need to have a clear idea of your financial constraints before buying a townhouse.
While there are various benefits to purchasing a townhouse, the essential service should be its location. Avoid buying in a townhouse located in an area that won’t provide you with healthy capital growth.
Fundamental Indicators Of Good Resale Value
There are some indicators of a home with good resale value regardless of its location. These are the features that buyers will look for in a home.
More than two bedrooms
If almost every home in your neighbourhood has only two bedrooms, owning a home with fewer than three bedrooms is not necessarily a drawback. It is a drawback if you are trying to attract more buyers since many will prefer to have more rooms. A home with three bedrooms or more is often a better choice to ensure future resale value.
More than one bathroom (including a master bathroom)
Buyers will still buy a one-bath home but at a much lower price than expected. When given a choice between a two-bath home and a one-bath home, first-time home buyers will almost always opt for the two-bath home, even if the cost to install a second bath is much less than the price difference between the two homes. Moreover, it is not enough to have two or more baths. A home without a master bath may also suffer from a lower resale value.
A family space is any space in which a group of people can congregate. Whether to entertain friends or host a neighbourhood gathering, buyers want an extra spacious and informal room. The days of the formal living room and parlours are over.
Ample storage spaces and closets: People today collect too much stuff, and they have to store it somewhere. Walk-in closets are considered almost essential. Homes with small closets are hard to sell.
Even if the sacrifice is yard space, most buyers prefer a one-story home or at least a house with a first-floor master bedroom. But, you should be mindful of your neighbourhood.
In neighbourhoods with a mix of two-story and one-story homes, you should not buy a single-level home surrounded by multiple-story homes.
Unless you live in an urban area where most occupants rely primarily on public transportation, you need a place to park your car. Two parking spots are preferable, and if the garage is in a covered, enclosed area, all the better. You may encounter resistance to homes with fewer than three parking spots in the garage in some suburban locations.
Good flow and open floor plan
Few buyers want a chopped-up, closed-in space. Homebuyers prefer natural light and open spaces, with a common-sense flow that is interconnected without satellite rooms. A wing is acceptable; however, many families with young children do not want the master suite separated from the other bedrooms.
Updated and remodelled
Simple, do-it-yourself home improvements can significantly enhance a home’s resale value. The two best rooms to remodel are the kitchen and bathroom. Homebuyers prefer central heat and air, and some loans (such as the energy-efficient mortgage) will provide funds for such updates upon purchase. Finding the right duplex build is an important decision. Check out our range of the best home design constructions at Home Builders.
Is Investing In Townhomes Right For You?
Having outlined the above, people need to ask whether investing in townhomes makes sense for their specific situation.
If you’re considering a fix & flip strategy, you’ll likely own a townhome for short enough period to avoid its inherent volatility. Additionally, suppose you have the staying power and discipline to pursue a long-term buy-and-hold strategy with a townhome. In that case, this property type works well due to the long-term property appreciation they experience.
I want to leave you with some final thoughts. Before 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 neighbours. If the HOA has any significant problems, they’ll be the best people to ask for details.