Author Topic: Can townhouses be a good investment?  (Read 22803 times)

La Bibliotecaria Feroz

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Can townhouses be a good investment?
« on: January 17, 2015, 03:53:57 PM »
We're thinking about buying a townhouse and something about the idea makes me a little skittish--having an HOA. not as much appreciation as with a single-family home, etc. But in a lot of ways I like the idea, so I guess I'm looking for reassurance/success stories. These are the facts:

1. Family of 4, so we do need some space now.
2. We're looking in Southeast Denver.
3. Even with putting down very little, we would likely have a mortgage less than our current rent ($1305) even for a bigger place and even including HOA fees.
4. We could buy a townhouse for in the vicinity of $180K (one that we're looking at is over 1400 square feet), while single-family homes that we've looked at are much more expensive, even when they're smaller.
5. Our annual income is only about $85. We could get approved for a $300K house, but obviously the mortgage would pinch.
6. We might consider renting it out one day, but we aren't buying it for that--we would be buying it to live in indefinitely.

The math seems seriously in favor of it, but like I said, I feel leery because so many people say that townhouses are a bad investment. Any advice?

SaintM

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Re: Can townhouses be a good investment?
« Reply #1 on: January 17, 2015, 06:10:06 PM »
Buying a house to live in has completely different considerations than buying an income property. One of those is the HOA fee. More broadly, you negotiate differently because there is not as much emotion attached to an income property.

My advice if you want to live in this house, it fits your budget, and it fits your other consideration, then go for it.

Davids

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Re: Can townhouses be a good investment?
« Reply #2 on: January 17, 2015, 08:06:13 PM »
I live in a town home and I love my house. It is more than enough space for my wife and I and now our baby boy. In terms of property value we did buy the house in 2010 and the value today is basically the same, maybe a couple grand more, than what we paid for it in 2010. We do have an HOA fee but it is fairly low compared to other HOAs. Unless a job opportunity comes along where we have to move I see us living in this home at least until our baby boy graduates HS and goes on to college.

NW Girl

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Re: Can townhouses be a good investment?
« Reply #3 on: January 17, 2015, 08:11:43 PM »
Well, I think it depends a lot on the locale.  In urban, dense neighborhoods, I can't see why a townhouse would be a poor investment.  In suburban, lower cost of living areas, I would imagine they wouldn't increase in value very quickly.  We've owned two --- one in the DC area (dense, expensive area) and we bought one in Seattle 18 months ago.  We had a buyer for our DC townhouse before we officially listed it on the market (albeit we didn't make a profit as we bought in 2006).  Our Seattle townhouse (popular neighborhood, close to downtown) has increased in value from 340K to 415K (I think we got a little lucky on the initial sale price, however) and there are no HOAs.  Townhouses have been a good fit for us.  Less yard work and repairs without having to raise kids in a condo.  They've allowed us to live in really nice areas and significantly lower our commute without buying more house than we can realistically afford.   

swick

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Re: Can townhouses be a good investment?
« Reply #4 on: January 17, 2015, 08:40:26 PM »
It'll be different depending on where you are, but all I can suggest is if you do go ahead with it to word your offer very carefully so you have an easy out. Then use that time to really dig into the details of the HOA. We put in an offer on a townhouse in a complex that we were already living in. It was managed out of town but there was a local strata council. You should be given a copy of their minutes for the past year if you submit an offer. This will tell you A LOT of information about the complex - especially in regards to which ones are rentals, if their have been any noise/bylaw/other complaints made about specific units, previous problems, how healthy their reserve fund is, if they have any major capital projects coming up or what the rules are regarding adding levies.

In our townhouses there was major damage to a windstorm several years ago. An extra 20,000 was levied against each unit to repair all the damage. This was in 2010 They were still working in it when we moved in and for several months. In the process of repairs they opened the walls to discover that many of the units had not been insulated above the main floor. They were assessed another 5,000 to finish the repairs.

When we had the building inspector come in he popped his head into the attic and came down and went to his truck to get his HAZMAT gear. It looked like there had been a fire in the attic everything was black the firewall between the two units was crumbling. Then we noticed we could see sky through the roof where they had cut the hole for the bathroom exhaust and not repaired it when they redid the roof. It was all mold.

No one knew who's responsibility it was and we went back and forth with the property management company who kept putting us off. Then the day our offer was set to expire they come back with "GREAT NEWS! It is not your responsibility! Strata has to pay for it!" To which I responded with "yeah and then they'll tack on another levy that would be our responsibility" In the process of trying go get some answers I ended up just calling the president of the strata council and she mentioned that there were at least 4 other units she knew of that had varying degrees of mold issues that would need remediation. We walked.

I know for a fact that our landlord lost considerable amount of money due to all the levy's, with repairs costing that much, he basically had to absorb the loss as he couldn't just raise our rent. He lost money every month as well as once the HOA fees came out and the market was a bit of a slump. He used it as a write-off against another property of his.

My aunt on the other hand has a townhouse, sits on her strata council and loves it. It is much smaller and in a much bigger city though. I think it depends on your purpose for wanting a townhouse and seeing if that particular one you are considering is a good match for your family.  The thing that has never sat well with me is you are responsible not only for our house and all your actions, but everyone else as well.

La Bibliotecaria Feroz

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Re: Can townhouses be a good investment?
« Reply #5 on: January 18, 2015, 08:58:04 AM »
All food for thought, thanks. We are basically trying to decide today between a $180K townhouse, 1400 square feet, and a 2000 square foot house for $324K. (Actually the townhouse would probably be less, while our real estate agent told us to offer $330K for the house as it has other offers.)

The townhouse is a more obvious fit for our income, but the lack of appreciation over the years would probably actually leave us not much better off, if at all, from buying it over the house. But we would have more cash available for travel and tax-advantaged saving if we buy a townhouse.

Mulling continues...

Megma

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Re: Can townhouses be a good investment?
« Reply #6 on: January 19, 2015, 08:41:28 PM »
I live in a townhouse for similar reasons to yours, sigh are very expensive here and there are lots and lots of town homes. Look for an hoa where the priority is keeping fees low, if there's good owner management most people are going to want lower fees as they also pay them!

Regarding some of the horror stories, if you own a sfh and open the wall and find mold or fire damage you have to pay to have it fixed yourself also.

Appreciation will vary by market, my condo I owned in dc appreciated a lot while I had it, some of that was probably that I got a good buy on it but I had several offers bc I that market many people can't afford sfhs, just like I couldn't!

GrayGhost

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Re: Can townhouses be a good investment?
« Reply #7 on: January 19, 2015, 09:45:14 PM »
All food for thought, thanks. We are basically trying to decide today between a $180K townhouse, 1400 square feet, and a 2000 square foot house for $324K. (Actually the townhouse would probably be less, while our real estate agent told us to offer $330K for the house as it has other offers.)

The townhouse is a more obvious fit for our income, but the lack of appreciation over the years would probably actually leave us not much better off, if at all, from buying it over the house. But we would have more cash available for travel and tax-advantaged saving if we buy a townhouse.

Mulling continues...

I'd recommend against betting on housing appreciation. It's rather like picking stocks. Yes, the value of a house can go up, even dramatically, even in a short period of time. But the value can also plummet just as quickly. As far as landlording goes, cash flow is pretty much king as far as I'm concerned. I have posted brief rants on these forums about colleagues who buy properties that only "flow" a hundred or so bucks a month before taxes and repairs. Yes, they will eventually own a house free and clear, but it'll be an older, well-worn house, and there's no reason to believe that it'll have appreciated.

Frankly, given the two choices you've got, I think I might spring for the townhome. You'd keep more of your cash in your pocket, and you could then use this to buy better cashflowing properties, or the old standby of indexed stock. To me, that's a far better investment strategy than speculating on a house you don't even intend to be income-producing as a primary function.

xDavidx

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Re: Can townhouses be a good investment?
« Reply #8 on: January 25, 2015, 08:43:51 PM »
Hello frugalparagon,

I bought a townhouse about 6 years ago not too far from where you are looking (Castle Rock, CO). We paid 180k for it. About 2 years ago we refinanced it and about 6 months after that we bought a new house. We are currently renting the townhouse out for about 500 more than the mortgage payment. Zillow says we are under charging for the rent. Zillow also estimates that it is worth about 230k.

So far I think it has been a great investment. Hope my experience helps.

La Bibliotecaria Feroz

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Re: Can townhouses be a good investment?
« Reply #9 on: January 25, 2015, 08:47:00 PM »
Thanks for sharing your experience, xDavidx. I think we are leaning toward getting something with a yard for our very active boys (who are years from being old enough to go to a park alone), maybe in Littleton (not so expensive but still on light rail). But we are still casting a wide net and it's nice to know that a townhouse would probably work out one way or another, if we see a good deal on one.

LucyBIT

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Re: Can townhouses be a good investment?
« Reply #10 on: January 26, 2015, 02:58:36 PM »
Townhouses have been a good fit for us.  Less yard work and repairs without having to raise kids in a condo.  They've allowed us to live in really nice areas and significantly lower our commute without buying more house than we can realistically afford.

Frankly, given the two choices you've got, I think I might spring for the townhome. You'd keep more of your cash in your pocket, and you could then use this to buy better cashflowing properties, or the old standby of indexed stock. To me, that's a far better investment strategy than speculating on a house you don't even intend to be income-producing as a primary function.

We're considering townhouse vs SFH for these very reasons. The "American Dream" rhetoric tries to dissuade first-timers from choosing cheaper starter places, and I think it's silly. It's a decent compromise on the poor investment of a residence, anyway.

We are currently renting the townhouse out for about 500 more than the mortgage payment. Zillow says we are under charging for the rent. Zillow also estimates that it is worth about 230k.

My hunch is that a townhouse would be easier to rent out if we ended up with a SFH down the road--easier then, say, if we bought a house and then later needed a bigger place for kids, needed a new location, etc.

We're renting a townhouse right now, and if it had a yard and were closer to work I'd never want to leave. The only other consideration would be that my husband would like it if we weren't sharing walls, so he could play music without disturbing the neighbors, but you can't blow out the speakers in a residential neighborhood regardless of wall-sharing (not without noise complaints), and soundproofing a room would be far less than the price differentials I'm seeing in the Denver area.