(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
Townhouse vs. Duplex
This post teaches you whether you should invest in a townhouse or a duplex.
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 duplex and townhouse, as well as which one is the better investment property overall.
Let's get started.
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What is a duplex
A duplex is a house consisting of two units with two separate entrances.
Duplexes are stand-alone-properties, much like single-family homes.
In most cases, a duplex is a single-family home made into two separate units.
Often they are homes split into two separate units; "side-by-side" or an “up-and-down” split of a single-family home.
The properties are usually extremely similar or even identical.
Duplexes give investors the ability to house-hack. House hacking means a landlord can live in one unit and rent out the other, which has many advantages.
What is a townhouse?
Townhouses are often rows of uniform homes that are two stories or taller.
They typically share one or more walls with other independently-owned units.
Unlike condos, residents/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.
Investing in a duplex
The important thing to think about when investing in a duplex is whether or not you are going to live in one of the two units.
The pros and cons may differ depending on what you, the landlord and owner, decides to do. You may also have to give up certain things that you would ideally like for your living arrangements, like living far from neighbors or in a certain neighborhood.
To make a good investment, you must think about the property and the type of tenant it will attract, rather than your own personal wishes.
While some of these pros and cons change depending on the living situation you choose, so does the value of the property. House hacking, which we will talk more about in the next section, is one of the main reasons investing in a duplex is a good idea. The fiscal assurance of a duplex might change, if you decide not to partake in house hacking.
Read on to the next section to understand the pros and cons of investing in a duplex, bearing in mind what your living arrangements would be.
House hacking means that you live in one unit and rent out the unit next-door for cash flow. With this method, you get to live in your investment property while also keeping an eye on it at all times. House hacking is the perfect scenario for a first-time investor wanting to know how to learn real estate investing.
Keep watch on your property 24/7
It's much easier to keep an eye on your property and tenant when your unit is connected to theirs. This is a great way to get started after you ideally find a cheap duplex for sale.
You might end up with a better tenant
You will probably rule out most bad tenants that pay late and party into the night because they know they'll be living next to their landlord. You will also be less likely to encounter a hold over tenant.
A hold over tenancy is when a tenant continues to live in a property after his or her lease has expired, without the landlord’s explicit permission.
Mortgage companies tend to give better interest rates to people buying a property they will also live in. They also consider a duplex as one property which can help you get a better rate as well. Many lenders will even allow you to include part of the potential rent into your income when qualifying for a mortgage.
It also means that you are unlikely to have to pay the whole mortgage yourself. The rent you are collecting from your tenant should be enough to cover some of the mortgage.
Duplexes for sale are generally located in affordable areas primed for growth. This makes them an excellent investment for a first-time real estate investor. Cost wise, you will also benefit from having two units in one transaction. Your building and landscaping costs will be lower per unit compared to two single-family rental units.
Property taxes will be lower per unit than they would be compared to two single family homes of equal square footage.
Rent to a family member
You can rent the additional unit to a family member who needs more supervision, instead of them moving into a nursing home. This sort of living situation works well for many families. You have your beloved family members close by, they maintain their independence, and everyone has some privacy.
Maintenance, repairs, and your rental schedule will all be in your complete control with a duplex (assuming you own both halves). With a duplex, you control the vendor list and you control the rental demand in ways you do not with a townhouse rental property.
For example, the townhouse may have a no pets rule. That makes your available tenant list shorter, and possibly also reduces your rental income.
High Cash Flow
Renting out both units will produce monthly cash flow. And if you’ve taken the time to do your homework and snagged a great deal, it’s likely the combined rent from both tenants will cover the entire mortgage and then some. This makes owning a duplex, potentially very lucrative.
Did you know that investing in a duplex as an investment property qualifies you for several additional tax deductions? Whereas single-family homes don’t offer the same tax breaks, duplex owners can deduct most expenses for maintenance, yard work and repairs.
But remember, renting to a family member can disqualify you from some of these deductions.
Cons of investing in duplexes
Living right next to tenants
House hacking a duplex means that you are the landlord, but you are also next-door neighbors with your tenant. You want to be sure and set boundaries so your tenant doesn’t think it is okay to knock on your door at 10 at night because his/her stove isn't working.
Evicting a tenant is a pain
When you have to evict a tenant, living next to them can make the process more uncomfortable. Just imagine serving your tenant a notice to evict but then running into them daily.
In most duplex investment properties, you are the sole owner. That means that you will not have a condo association to help you with maintenance. You will have to stay on top of issues within your property and fix them yourself or pay extra to hire someone. This can cost you a lot of extra time and money.
Investing in a townhouse
The major difference between a townhouse and a duplex is that Townhouse units share walls with other units, similar to a condominium.
Depending on the layout, you may have both a front and back yard, or a small patio area. Generally there will be less yard space (and therefore less maintenance) compared to a single-family detached home, or a duplex.
From a financing perspective, a townhouse is treated the same as a “normal” house. Since they usually take up less land and there are economies of scale to building a shared structure, you can often save money by buying a townhouse.
When looking at perspective townhomes to buy, ensure that the community allows units to be rented. Some have owner-occupied-only clauses. The rules are always available to buyers and it is wise to go even further. Ask the trustees their thoughts on the rental properties in their communities.
Avoid purchasing any townhouse in a community that feels rental units are problematic, or that restricts how you will rent the property after you take ownership.
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.
Townhouse residents have plenty of privacy, close to as much privacy as a single-family home or a duplex. This is because they're detached units.
Because townhouses have shared walls & common areas (sometimes), they could be considered cost-effective.
Cons of investing in townhouses
Lack of appreciation
Townhouses 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/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?
There are plenty of reasons why investing in a duplex will work out better than investing in a townhouse. Remember: It's not that townhouses are inherently bad investments. You could invest in townhouses and do perfectly well for yourself.
But, you should not be thinking about whether a property type is a good investment or not. Instead, you want to think about how well a certain property type will do in comparison to other property types. It's all about quality investments, not quantity.
Whether you decide to buy a townhome or a duplex, 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.
You will find that townhouses are fine. Duplexes are much better.
Read on to understand how a tool like Lofty AI can help to find these prime investing properties, like a duplex.
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