(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
Condo vs. Townhouse
This post teaches you whether you should invest in a condo or a townhouse.
Subtle hint: Invest in condos, not townhouses.
As properties that are often confused with each other, this post will highlight their differences and similarities. Understanding the differences between the properties will make it easier for you to choose which investment is right for you.
This post will also walk you through the pros and cons of both a condo and townhouse, as well as which one is the better investment property overall.
Let's get started.
What is a condo?
A condominium is a private, individual unit located in a building with other individual units.
Unlike an apartment, a condo is owned by its resident, not rented from a landlord.
Residents own and maintain the interior of their unit but don’t own the property on which it sits.
The exterior, lawn, and shared spaces are maintained by the Homeowners Association or HOA.
What is a townhouse?
A townhouse is a property that shares one or more walls with other independently owned units.
Townhouses are often rows of uniform homes that are two stories or taller.
Unlike condos, residents and investors own the interior and exterior of the property. This includes walls, lawns, and roofs.
Maintenance costs are determined by the community's HOA, while insurance is paid for by the owner.
Condos have more of a community built in than townhouses and other investment properties. This includes clubhouses, pools, and gyms. Because of these amenities, you're generally able to charge higher rents to tenants.
Properties with attractive amenities are often in high demand. That can mean a quick turnover when a tenant moves out. Short vacancies are an investor's best friend when it comes to managing cash flow.
Most condo communities have security and are gated. This is helpful when convincing tenants, especially those with families, to move in. Depending on the building, you may have secure entrances and parking, a doorman or concierge, and other amenities that increase security and safety.
Because condos tend to be more compact and require less land than single-family homes or duplexes, they tend to be a more affordable way to own property. Property taxes tend to be lower as well.
For some first-time buyers, condos can make ideal starter homes because they do not require the upkeep and maintenance of a detached home, but you can still reap the benefits of ownership and building equity.
Of course, this doesn’t hold true in all markets – property investors should also consider property values in the neighborhood, the cost of living in the area, and HOA fees when comparing costs.
To truly maximize your returns, you want to look for a Class C condo located in a Class B neighborhood that you can add value to that will also benefit from rapid neighborhood appreciation.
Condo communities will often organize social events like pool parties and barbecues. Because you tend to see your neighbors in hallways and in elevators, you’re more likely than not to meet them in person.
The rules of the HOA about maintaining the property also lend itself to creating a homely and calm environment that is often attractive to many people, especially families. People may be willing to pay more for these aspects.
The association serves as a policing force that prevents owners from neglecting their property and discourages bad behavior by residents.
Speaking of good neighborhoods, most of the time these investment properties are in desirable locations that provide an attractive lifestyle. Buying a condo for investment instead of a detached home in such locations can bring you a better return on investment.
One of the biggest perks of investing in a condo rental is that the maintenance is more often than not done by the HOA, not the condo owner.
You do not have to worry about mowing the yard, fixing the roof, shoveling the snow, etc. – your monthly condo fees cover all maintenance expenses and other people will do the work for you.
For a real estate investor that’s busy with work, likes to travel, or simply doesn’t want to deal with all that work, this is a major benefit of buying a condo for investment. Moreover, this creates a huge demand for renting condos because tenants themselves don’t need to worry about the maintenance either.
Rules set by the HOA can help keep your property clean and well-kept for years to come. A tenant would need permission from the condo association to make changes to the unit, inside or out.
Often, residents are prohibited from conducting any business activities from a home office. Condo rules are likely more strict than similar properties not deemed a condo. This helps to deter unwanted activity that leads to property depreciation.
Cons of investing in condos
Potential HOA issues
The HOA fees can range from under $100 to as much as $300 per month depending on the complex, location, and quality of your community. Adding these fees to the regular principal, interest, and tax payments on the mortgage, might be a reason to opt against buying a condo for investment.
Although you're paying high HOA fees, maintenance issues such as lawn mowing or pool cleaning may not be handled correctly.
Unlike townhouses, your condo is surrounded by neighbors above, below, and beside you. There's a good chance at some point in your ownership that you or your tenant will end up getting a neighbor you wish hadn't moved in.
If the neighbors are undesirable to live next to, you may have a hard time keeping your tenant happy. This can result in higher-than-desired vacancies and constant tenant turnover.
You, as the owner, likely will have to personally handle grievances with your neighbors (other tenants or owners), which can be frustrating and time-consuming.
On the flip side the rules set by the HOA can have a negative effect on your property and ROI. Each resident must abide by the community rules on issues such as visitors and pets. Rules change from one community to the next and are determined by the condo's property management company.
As a real estate investor, you want to be sure that the condo you’re buying can, in fact, be rented. Many HOAs have strict rules against renting and don’t allow it. Others have what is called a “Rental Cap,” – this is a limit that restricts the number of condos that can be rented out vs the number of owner-occupants.
Condos can be a risky investment because you are sharing ownership with other people in the same building. It's possible that if one person forecloses or short-sells their condo, it can take a toll on your value since you own a condo in the same complex.
With inflation comes more profits for you, but likely also higher costs of HOA fees. If you don't budget for increasing fees, you could get into a position where you can't afford the condo fees or special assessment.
Condos are harder to finance
If you’re buying your first investment property, you are most likely going to take a loan to finance the purchase. If you are interested in buying a condo for investment, one thing to definitely keep in mind is that obtaining a mortgage is much harder for a condo than a detached single-family home.
Banks and other lenders are more amenable to condo’s with a homeowners association with a low delinquency rate and no ongoing litigation.
Pros of investing in townhouses
Plenty of living space
Townhouses tend to be very large in size, much larger than condos. Townhouses usually stretch to 2-3 stories. This would be a good alternative for someone that is looking for something closer to a single-family house, than an apartment.
Townhouse residents have more privacy than condo residents. Unlike condos, townhouses are detached and do not have neighbors on top, bottom, and on the sides. Owners of a townhouse have almost as much privacy as a duplex or single-family home owner would have.
Lower HOA fees
Townhome owners pay lower monthly HOA fees because they pay for most of their upkeep.
Because townhouses have shared walls & common areas (sometimes), they could be considered cost-effective.
Cons of investing in townhouses
Lack of appreciation
Townhomes are notoriously known to appreciate less than other property types. While some investors view appreciation as a "nice to have," it's a crucial factor when considering a potential investment.
Though you will be paying lower HOA fees than condo owners, you will still be paying HOA fees. These fees are generally around $300 per month.
Townhouses have individual maintenance requirements. For example, you may be responsible for your own roof. These maintenance requirements are different from condo's. With a townhome, the ease of having the HOA take care of all the maintenance of the exterior is lost. But, the HOA will still be in control of many aspects, and you will need to bow to others’ needs and wants.
Which is a better investment?
Condos are a better investment. Property appreciation, extra security, and direct access to amenities more than make up for the extra $100 per month you will spend in HOA fees.
Remember: It's not that townhouses are inherently bad investments. You could invest in townhouses and do perfectly well for yourself.
Plenty of investors will see the higher HOA fees, the riskier investment and the possible issues with financing and assume condos are worse investments. People will worry about the hit to monthly cash flow. But that's thinking short-term compared to what you should be thinking about: The future worth of your property in the long term.
Don’t get stuck trying to figure out about whether a property type is a good investment or not. Think about it like this: You want to think about how well a certain property type will do in comparison to other property types.
Whether you decide to buy a townhome or a condo, all investors are looking for the best ROI or “return on investment”. Click on the link to go to Lofty AI’s blog on calculating ROI. Many factors go into your ROI, such as property condition, appreciation potential, and how well tenants care for your rental.
If you are ever confused about which property seems right for you, just remember that the key is to figure out which property will generate a better long-term return. This will eventually be the best investment.
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