Investing in Condos or Townhomes
If you want to stick in the single family investing realm, but cannot seem to find an affordable detached home, a condor or townhome may be a good option for you.
Comparatively to detached homes, condos and townhomes are the more affordable asset class to begin your real estate investing career. Although price per square foot will be higher, your overall financial barrier to entry will be significantly less. Smaller down payment and mortgage payments equal less risk as a beginner investor. Condos and townhomes have their pros and cons as well.
Lower upfront costs are the main benefit when owning condos and townhomes. In addition to the upfront financial ease, the ongoing exterior maintenance will be handled by the Homeowners Association (HOA). This can be where condos and townhomes lose their luster. We will discuss this more later. Owning a condo or townhome and being a part of an HOA allows you to forget about exterior maintenance and landscaping. Less headache and a great (hopefully) looking exterior.
We are in an everchanging world where developments are getting shopping centers, parks, pools, playgrounds, and dog parks to attract the mobile working population. To be able to shop, eat, and play in your neighborhood is quite popular amongst many developers these days, but historically, these amenities (pool, clubhouse, park, playground) are reserved for condo and townhome complexes. Meaning, you have built in amenities that you can offer your perspective tenants upon ownership. Although you will be paying a monthly HOA expense, you will get some reprieve from your monthly insurance expense. Rather than paying for dwelling and replacement coverage, you will be just paying for hazard insurance and personal contents. So, your monthly insurance premiums will be smaller. The HOA dues, in part will be going towards broader building coverage that the HOA is responsible for maintaining.
Less headaches and maintenance. The biggest issue when tenants are responsible for the landscape and snow removal of a property is that it doesn’t happen. In a condo/townhome complex, this is no longer an issue. The HOA monthly bill will handle this. You will not be responsible for cleaning out the gutters or blowing out sprinklers, your only responsibility will be to change out smoke detector batteries and service the furnace/A/C.
Condos and townhome investment properties hold their value in the long term as well. A single-family home can change hands many times. Exterior painting could be neglected, gutters could come lose, and water could pour down the facia, rotting away trim and siding. No additions without permits to buildings. No neighbors painting their house pink or putting up a greenhouse in their front lawn or parking their 5th wheeler outside the house. Living in a condo or townhome complex with an HOA will hold the development to a higher standard. Annoying? Yes, but overall stability of your property? Yes.
The variability of the HOA can get messy. We can compare HOAs to a fingerprint, no two are alike. What the costs pay for and how well the HOA is operated varies drastically.
Just because you are paying a $300/month HOA vs a $150/month HOA does not automatically mean the $150 HOA is worse. The $150/month HOA could simply be paying for exterior maintenance and landscaping. Is that really worth $150/month or $1,800/year? Hardly. On the other hand, the $300/month HOA could be paying for high speed internet, water, gas, pool and clubhouse rights as well as the exterior maintenance and landscape. Could your water, gas and internet add up to $150/month? If you’re like me and use SlingTV while having a 10-month old who needs the house at 72 degrees to sleep through the night comfortably, easy. It is important that you inspect what exactly the HOA will be paying for.
The hardest thing to overcome can be neighbors and sharing walls. I will not share walls if I have the choice ever again. Do you like the idea of your neighbor listening in to your private conversations? A property would have to be very appealing in all the other ways for me to consider sharing walls again. That could mean living upstairs vs downstairs to someone.
No land ownership. What are the main differentiating criteria of a condo vs a townhome? A townhome COULD have ownership of their lot while a condo has no land associated with the property’s ownership. That doesn’t mean that you won’t benefit from the appreciation of land as would a single-family detached home would, it just means you will benefit in a lesser manner. When we measured the appreciation above, the land is the main source of appreciation. If you live on the 3rd floor of a condo complex, the two other condos below you are on the exact same amount of land. If a .1-acre lot appreciates in an area 5% over a year, a single-family home gets the full 5% appreciation associated with their home. Where, your condo will share that 5% appreciation of the .1-acre lot with the 3 units that sit on it.
When comparing single family homes and attached homes, you must start with the lot. If you own a single-family home on a half-acre lot in a zone where you could potentially build, you could add an Additional Dwelling Unit (ADU). Shout out to Portland for giving me the introduction, you could add a second source of income on your lot. Owning a large 1-bedroom condo, you could convert it into a 2-bedroom condo and increase its rental value. You are able to update the bathrooms and kitchen, or add hidden storage shelves and increase the usability of the space, thus increasing the rental value of the property. That is the extent of your abilities to alter or change the condo. Interiors only.
In general, you would want to invest in a condo if your goals are minimal maintenance, headaches, and lower barriers to entry. Your focus is on cash flow with a potential for property appreciation, while paying down principal. You are not going to get rich from the cash flow from condos, but it will be stable. It is a safe play for a first investment.