All Forum Posts by: William Govans

On the townhome vs detached debate there's a lot going on.  Since I have nothing else to do on a Sunday [lie], I'll try to elaborate.

Up in Cache County, we have two major subdivisions of townhouse style condos built in the 1980's and 1990's respectively with a scattering of smaller subdivisions and some major starts in the past 3 years.  The 20 and 30 year old subdivisions have done almost nothing as far as appreciation in this time frame (15-20%) where 25-30 year old single families have almost doubled in value.

I've put together a chart to show what's been happening in your neck of the woods.   Unfortunately I don't have older data, so it doesn't tell as compelling a story as when these buildings hit end-of-lifecycle issues as our 1980's development has.

As you can see the trend lines are separating with the single families appreciating faster even with the recession.  I think that the reason that the separation is not more dramatic is that new construction represents a significantly higher percentage of townhouses than with single family and the rising prices are at least partially attributable to the rise in material costs.

The situation in Salt Lake and Utah counties is quite different as townhouses represent an entry level price point that is becoming rarer and rarer in detached single family houses.  In Weber county, there is no shortage of $150-175K existing construction so there isn't a flight to townhouses for first time home buyers like there is in higher density markets.

End of lifecycle issues present a major problem for townhouse communities and it's a tightrope walk that HOA's constantly battle with. There is a lot of discussion here on BP on how to plan for capital expenditures or capex for investment properties. A new roof that requires a special assessment in an already deteriorating town house community can be devastating. As the 30 year old buildings have not appreciated substantially, there is little equity to tap into for the improvements and no other choice but to raise dues, taking a bite out of cash flow. There is a lot of resistance from HOA communities to plan for capex in the dues, so most don't--at least not adequately.

Furthermore, as townhouses are often entry level properties, the communities are somewhat transient. Particularly in Utah, growing families often move on to larger homes as soon as they can they can afford it. As a result, as these communities age, they do not gain the benefit of becoming "established neighborhoods". To counteract this trend, some HOA by-laws often establish very restrictive rules to limit non-owner occupants (renters). Pay careful attention to this.

I'm not saying that condos/townhouses are bad in all markets.  They can perform very well when they hit a price point that is otherwise unavailable in high density/very expensive areas.  Also, in some markets, townhouse community amenities (like spas and pools) can demand a high rent premium. 

As the tenant market is very price sensitive, the only reason I would ever consider buying a townhouse is if I could not meet the price point with other types of housing. Single family detached, at least in our area, has the benefit of appreciation, and multi-family with no HOA and CC&R's gives you more control.

As far as maintenance goes, you are still responsible for fixing a leaky faucet or a backed up toilet in each of these types of housing.  Maintenance requirements will depend much more on age, quality of construction, and upkeep than property type.  Of course, landscaping and snow removal are issues with multi-family, but can easily be passed on to the tenant in single family.

Hope this helps.

@William Govans

Certainly get comfortable with leverage.  It is a major component of why real estate is such an attractive investment (along with tax benefits, principal reduction, and appreciation).

Right now, mortgage interest rates are at an all time low.  With cap rates at 6-7% and the ability borrow (and lock in a 30 year fixed rate) at 4%, you would be taking less than full advantage of the timing of your windfall by not seriously considering loans.

During the crash, most of the people who got in trouble were bitten by adjustable rate mortgages and 100+% LTV. Banks are pretty conservative and have developed guidelines that prevent unnecessary risk.

I think you should add talking to a lender in your mix of real estate professionals and do it early.  They will be able to tell you how much you can borrow and educate you about cash reserves and other leverage risk mitigators.

Where are you looking specifically?  One of the reasons I ask, is that townhouses or attached housing in certain markets have experienced almost no appreciation, particularly in comparison to the detached single families.  To add to 's comments, the primary reason that investors favor townhouses is that they are completely turnkey with low maintenance costs provided a good association.  But traditionally, the detached single family has performed much better.

And remember there is no hurry.  Interest rates might tick up a bit this summer.  But continue to educate yourself about risk and the micro markets you are looking in.  Certain areas are a little frenzied right now, but there are plenty of solid conservative investments out there at all price points.

Hope this helps.

@Blair Poelman

Have you considered buying trust deeds from hard money lenders?  

I'm sorry for your loss. Good for you on planning for the future, it sounds like you're going to make responsible choices with this gift. You'll find that real estate is a fantastic store of value. Single family homes and townhouses are often going to fluctuate in price more than apartment buildings, because they follow the retail market, where apartments are based on how much income they produce. 

There is for sure a middle ground between buying properties for cash and flipping houses. I buy primarily small multifamily homes and do venture in to the single family home realm a bit as well. By breaking up your $250,000 as several down payments on several mortgaged properties, or say a 30% down payment on an $830,000 unit building, you would accelerate the growth of that $250k much more than if you buy a property outright. We have a developer up in Logan that is building townhouse style 4plex buildings in the $620,000 range and I believe that will prove to be a great cash flow and equity investment. 

It sounds like you understand the risks and benefits relating to the different buy and hold strategies, and I highly doubt the two townhouses you've found could be bad investments. You've obviously thought through it, and can see that they will preserve your capital well and generate nice cash flow. If you parlay your down payment into leveraged properties, your money will grow faster, and that $250,000 could be more than enough to last you the rest of your life by the time you decide to retire. No need to flip properties, but I think it's worth looking at repositioning your portfolio every 10 years to maximize your equity and accelerate your wealth.