Townhome investing. Confused on numbers

[Hina Pasha]

I have invested in single family detached homes in the suburbs before. But recently I have been looking into townhomes in the city and am making an offer on one which is part of a community. Are there any drawbacks going into townhomes investing? Also, i am a bit confused with the numbers and would appreciate any advice from all you seasoned investors.

It is a 3bed/3.5bath (2000 sq ft) $460000. HOA $2350, Taxes 10K, Insurance 1850. Rent estimate $3200.

Any feedback will be appreciated. Thank you

[Marshall Leipprandt]

@Hina Pasha I don't have any issues with townhomes as long as the numbers look good. The same general analysis applies to a townhome as would apply to a single family home. Here are some quick numbers on this deal:

Annual Estimated Rent: $38,400 

Annual Estimated Expenses: $47,080 (breakout below)

Debt Service (Assuming 20% down and 5.5% interest rate at $460K purchase price: $25,200, Taxes: $10,000, HOA: $2,350, Insurance: $1,850, Property Management (10%): $3,840, Vacancy (5%): $1,920, Repairs/Maintenance (5%): $1,920

Now, your actuals might be different, and you would have to add in if you are paying for anything like utilities, internet, landscaping, etc. This would make your cash flow even more negative. Overall, it doesn't look like a great deal as you are negative cash-flowing around $9,000 per year. I think you can find much better ways to deploy your capital for a better return on your money.

[Drew Sygit]

@Hina Pasha check the financials of the HOA to make sure they have plenty of capital reserves.

[Mike Wood]

@Hina Pasha  I get the same result as Marshall did, its not going to cash flow with typical debt service.  Even removing management, vacancy and maintenance it still does not cash flow with debt service.  If you purchase it with cash (no debt), your cash on cash return (assuming 20% for PM, vacancy and maintenance) would only be around 4.75%.  That is not an investment I would be interested in. 

[Hina Pasha]

Thank you for all the responses. The market has been so tough to get a property in Houston, nothing stays on market for more than 2-3 days and the prices are so high with very limited rental yield. Will have to keep searching and wait for the right one but not sure if anything will be more than max 5%.  

[Lauren Cutchen]

@Hina Pasha So many townhome monthly costs eat up the bottom line around here. Due to the sudden appreciation this last year, I've heard it takes about 18 months for rent to creep up (I forgot which BP podcast episode I heard that from). The market is tough in the Houston area, but it can be done! It's a numbers game. My clients recently put in 8 offers before getting one accepted. Persistence and being flexible about the property is what I've found to be most successful. Sometimes townhomes work, but most times they don't. 

[Cody L.]

Quote from @Hina Pasha:

Thank you for all the responses. The market has been so tough to get a property in Houston, nothing stays on market for more than 2-3 days and the prices are so high with very limited rental yield. Will have to keep searching and wait for the right one but not sure if anything will be more than max 5%.  

 I just bought 30 patio homes in the Galleria.  $245k/each.  They rent for $2,100/each.  Less rent:price ratio than my usual buy but they've cash flowed great.   And it was nice to 'mix up' my portfolio which is mostly lower end class C to add some newer patio homes in a nice area. 

Point is:  There are deals out there.  Just hard to buy the 1-off homes for cash flow as you're competing not just with investors (who might accept a smaller return), but with HOME BUYERS who are not looking at return at all..  they want a roof over their heads.

My advice:  If you can swing it, go for bigger/mutli deals.  And if you can't swing it, try to figure out a way to swing it :)