SFH vs Townhouse. Which one's a better rental property?

Question

Hey guys,

I'm looking to buy my first rental property. I've met with couple of real estate agents here in SoCal. But I have one question in mind. If my goal is to rent the place to the people, which one should I buy? Single-Home Family or Townhouse?

My understanding is SFH is harder to manage than Townhouse since the size is relatively bigger and maintain it would be much more expensive. BUT the appreciation is much higher SFH than Townhouse.

What do you guys think? Should I get SFH instead? Or townhouse?

Considering the area too. I can get a townhouse in a much nicer area than an SFH.

I need some guiding lights!

Thanks!

Josh Young · Answer

@Hansel Gunawan generally speaking, I have found that townhouses might cash flow better in year one, but they might appreciate less and might get less rent appreciation too.  Townhouses sometimes have a high HOA too, so that can really keep them from appreciating as much.  I personally prefer SFH if you can afford it, they do usually cost more, so they cash flow a little less in year one, but can cash flow more and become worth more in the long run. I think SFH can be easier to find good tenants for and this usually makes them easier to manage. But if you are talking class A vs B or even C and/or different build decades of properties then it's really hard to compare.  My advice either way is, don't buy into a high HOA fee and don't buy in a bad/cheap area.

Jason Wray · Answer

Hansel,

A few things to consider when buying a townhome versus a SFH is overall cashflow/ROI.  On one hand it is nice to have the hands off approach when it comes to landscaping, exterior maintenance, pool cleaning and savings on products like chlorine, gas and time for lawns, etc.  But it does come as a price and that is where the HOA fee becomes a menace.

Take the HOA fee for example without knowing your HOA fee I will use a generic amount.  Let's say your HOA fee is between $350-500 a month.  Thats a big chunk of change that cuts into your cash flow.  Now use that same amount of $500.00 that monthly payment is the same monthly payment for a $80,000.00 mortgage at 6.5%  The reason I show this is because by going with a Townhome or HOA fee you are cutting yourself short on the mortgage amount/home loan.

So if you purchased a townhome for $200K because of the HOA fee you could have afforded a $280K single family home because there is no HOA fee.  You would have to factor in the home owners insurance and taxes to be completely accurate but its still a bigger home loan.  That is jus one area to look at in terms of best bang for your buck.

You always want to do a little research on the townhome/cond's HOA in general to make sure they are no in distress or under litigation.  Making sure they have a sufficient reserve account and no restrictions that will effect your long term goals.

On the opposite side you might have a townhome that offers a closer location to an attraction, or located by an amenity like the beach or other.  Then it might make sense if it can be used or zoned as a STR AIRBNB/VRBO.