Is a Townhouse a bad first rental property?

Question

I've located a townhouse that fits all of my criteria (bedrooms, baths, price, garage, location, age, and potential cash flow) exempt one...  it's a townhouse!

I never expected to start off with a townhouse as my first investment and, quite frankly, I'm nervous about that.  Does anyone have any insight into townhouse rentals?

Rick C. · Answer

Agreed with @Patrick Nuciforo. My first rental was a townhouse as well, and while I have moved onto SFRs and Multi-families, I have continued to have good luck with the townhouse.

A lot of it comes down to the HOA. If I were in your shoes, I would do the following:

1. Review the HOA's financials (i.e. are there enough reserves built in, are over 95% of the properties in the complex up to date with and regularly paying their HOA fees, etc.)

2. Talk with the neighbors that might have some insider information on the operations of the HOA (i.e. do they have a history of giving residents ridiculous assessments, imposing obscene rules, etc.)

3. See what major expenditures the HOA covers (i.e. roof, etc).

4. Check the rental rules for the HOA (i.e. do they only allow rentals for a certain percentage of properties in the complex, are there any restrictions on the length of the lease, etc.).

If all of that checks out and your numbers still look good, then this townhouse might be an easy way to get your feet wet in real estate. Good luck!

Okeoma M. · Answer

@Eldon S Bailey

I was looking at a townhouse as a first investment. I like that there is less maintenance and you can usually get a break on insurance as well, since you are only responsible for the "studs in". The numbers looked good until I started to talk to other investors in the complex and learned there were a number of recent special assessments (new roof, paint and upgraded parking) over the past couple years which was eating away at cash flow. I also learned the HOA had decided to upgrade the pool (= more $$ eating at my cash flow).  To be fair, all these upgrades would increase the amount I could get for rent but not enough to cover the fees. Over the long run it may be worth it but I decided to holdoff as a first investment.

Point is: I would look also look into whether recent upgrades have been done or if the HOA have any planned. These upgrades may increase the value of the townhouse down the line when you decide to sell but will compromise cash flow in the short-/mid-term.

Anthony Robinson · Answer

@Eldon S Bailey did you ever go with this property ?

I live in an expensive market and I might not get approved for a loan big enough for a SFR, therefore we might go townhome instead

Antoine Thompson · Answer

I just look at a townhome with no HOA and the numbers make sense but are you available to refinance after renovations

Helen Kirk · Answer

I am in the process of purchasing a nice townhouse in an area close to a major university.  I'll probably be renting it out either to faculty or students because of its location.  There used to be an HOA, but it no longer exists, and hasn't for years.  My main concern is that the parking lot is beginning to show a lot of wear and tear.  Does anyone know how this repair should be done?  The city perhaps?  Should I try and reinstate the HOA?  Any ideas for this newbie???

Eldon S Bailey · Answer

Thank you all for the excellent comments.  I appreciate your input and will definitely be checking out the HOA first.

I looked at the HOA fees, but wasn't aware of all the other important details of the HOA. You may have saved me from a bad situation, or made a good deal even better. Either way, I appreciate you.  Thank you.

I will post the results

Rondi Frisch · Answer

As a former Community Association Manager (LCAM, I still have an active license, I just don't do it any more) in FL, I second every point that Rick C. made!  It all comes down to the HOA, how it is managed, and their financials--especially look at the reserve analysis and the balance sheet (it is public record, so call up the manager and ask for it before making an offer--it should be part of your inspection routine with HOA's and COA's).  Talking to the neighbors is GREAT advice to find out about the board of directors and scuttlebutt about the enforcement of the covenants.  It there is any concern about under funding of the reserves or talk of a special assessment to add something big to the common elements (like a pool or clubhouse)...run, Forest, run!

I'm now a PM and have a couple of investors who have townhomes and they are very happy with the management of the complex--it doesn't hurt that one of the largest investors in the community is also the on-site manager, so he is really looking out to protect his own investment and in turn is protecting those of my clients.  So, it is really a case by case analysis--it's all about the numbers.

Patrick Nuciforo · Answer

My first rental was a townhouse, still own it. It started as a primary residence for myself and turned into sort of a house hack. I got married so I moved out of it and instead of selling decided to rent it as its very close to a major university. So for my case it wasnt originally bought with the inention to be a rental however now that I am renting it out I am making good cash flow. The $200 HOA eats up good portion of profit but its easy to take care of.

I guess it comes down to the numbers really.... If you could find the same criteria your looking for in a multi-family than I would go that route first.

Is a Townhouse a bad first rental property?

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