Investing in townhouses?

Question

Hello everyone,I recently moved to the US from abroad, I would like to start investing in real estate and I was wondering if investing in townhouses would be a good idea.The pros are that there are many in my area, it's a very nice area (North of Pittsburgh, PA) so I wouldn't have to worry about problematic tenants and, they are almost all rent-ready or need very little cosmetic improvements. This would definitely help me overcome the fear of starting investing in a new country.On the downside, cash flow is almost always negative if I put 20% down and considering the current mortgage rates. That wouldn't be a big problem for me, I have a good job and have no plans to leave it, I would invest to create wealth in the long term. But does it make sense?I did some research, in my area a 2beds, 1.5 baths is about 200k and they rent for about 1.6/1.7k.Just wondering if anyone is investing in this type of property, I'd be happy to hear your feedback.Thank you!Andrea

Jason Wray · Answer

Andrea,Townhomes have Pro's and Con's and on the postive side they are managed through the association. You do not have to worry about landscaping, exterior renovations/repairs or up keep on any pool or amenity. The taxes are generally lower and the insurance is under an HO6 policy which is cheaper than hazzard insurance for detached homes. The negatives are HOA fee's that can be higher due to lack of reserves or constant repairs etc. There can also be renter shock if there are other renters/owners who do not keep up their property, play loud music, or pose as a problem in general causing renters to leave.I would run the numbers on the townhome versus a SFR or other multifamily options to see what the numbers look like with No HOA fee. More doors offer more cash flow and with having 20% down you can get into a SFR or any 2-4 Unit multifamily rental. I would look at apples to apples in regard to sale price.

Miranda Micire · Answer

Would you consider making offers under asking that would cash flow? I wouldn't buy a townhouse because of the HOA - there's excessive fees as well as potentially issues with renting. Some HOA's don't allow renters, others might be nit-picky on every little thing because they don't like renters. You should consider investing in Pittsburgh or surrounding areas in a B/C class area where you can get a similar (or less) priced single family house, no HOA.

Andrea Campo · Answer

Thank you Everyone for the tips!I was thinking about townhouses also because it looks like they are more "rentable" in my area. I'm renting a townhouse myself, and in my complex many of the townhouses are rented. If I look at SFHs for rent in my area, I can see that there are some that have been on the market for months. Is there a way to see online if the properties are rented out, so I can understand if there is a market for SFHs? What I'm doing right now is to save on Zillow all the SFHs for rent in my area and check how long they stay on the market, but it would be great if there was a way to check which properties are currently rented. Thank you,Andrea

Nathan Gesner · Answer

I would spend more time learning how to evaluate properties for cash flow. If you buy a townhome for $200,000 with 20% down, your mortgage payment will be around $1,100 a month. Add taxes, insurance, and HOA fees, and you could be pushing $1,500 a month. That only leaves a little bit to cover maintenance, vacancies, capital expenditures, etc. In other words, it's likely to lose money, at least for the first few years.As others have mentioned there's some measure of safety with property in an HOA, but there's also risk. The HOA fees will only go up over time. The HOA board can be run by idiots that drive the property value down. They can change the rules and make it difficult for you to rent. You may end up with a retired neighbor that spends their day harassing your renters. Here's a guide that describes what good cash flow looks like and how to analyze a property.https://www.biggerpockets.com/...

Eliott Elias · Answer

I don't buy town homes. They don't appreciate well and you end up throwing money away with HOA fee's.

Omar J. Gaitan · Answer

Hi Andrea, I too have been thinking on investing in a townhome, but as @Jason Wray stated, you are tied to the HOA and their fees. The maintenance fee can jump year to year. Also, you will have to check with the associate if they allow renters as soon as you close. Some associations have a 1-2 year period before renting out. However, on the pro side, perhaps you can find a loan to put 10%, you would pay PMI, but have extra cash in hand instead of the 20% down. You may be able to get positive Cash flow in that route.Keep doing the analysis. Wish you all the best!!