When it comes to real estate investing, many people only consider detached homes. But in certain markets condos and townhouses can also be worthwhile investments, even preferable, and deserve consideration when evaluating potential opportunities. Each property type has their pros and cons, but the important thing is understanding them and determining what characteristics best suit you as an investor. As you look towards your next investment, here is what you should know about investing in condos, townhouses and detached homes.
Cost of entry. When it comes to initial costs, condos are typically going to have the lowest barrier to entry followed by townhouses. These property types usually cost less to renovate than detached homes since there are common areas that fall into the homeowner association’s (HOA) responsibility. Condos also have the added bonus of potentially cheaper insurance. Often, a condo will only need "four walls" insurance since the shared areas will be covered by the HOA's policy. But condos typically carry with them the largest HOA fees out of the three property types, which can make these investments more costly than they initially let on (more on this later). And while detached home do have a bigger initial price tag, if you are prepared to sign up for more rehab projects, you can find good deals.
Appreciation. The rate at which a property appreciates will vary by location, so it is always wise to consult a real estate agent in the area where you are looking to make an investment. That said, in recent times appreciation for condos has outpaced single-family homes. While condo values were hit hard during the recession they are now appreciating at 5.1 percent annually compared to 3.7 percent for single-family homes in the U.S., according to Zillow. The current outlook for condos is good, but growth could be limited since investors cannot take advantage of forced appreciation methods. With a condo you cannot improve the exterior of the building or landscaping like you can with a townhouse or detached home, factors that can improve the curb appeal and force up the value of the house. Many investors also still find townhomes and detached homes attractive since you own the property the home is on, and it is an appreciating asset.
Maintenance. If you are looking for a low-maintenance investment, a condo is going to be the way to go. It is much less onerous, because the HOA is responsible for maintaining all the common areas of the building. So, as an investor, you only have to worry about updates to the interior of the unit purchased. On the other hand, when investing in a detached home, you are responsible for refreshing and maintaining the exterior of the property. Tasks like roofing, painting and landscaping can be costly and time consuming. A townhouse falls somewhere in between a condo and a detached home. Like a condo, it has the benefit of an HOA that provides services like snow removal and landscaping, which can make it easier to keep up while holding the property. But in the case of a townhouse, owners are responsible for the exterior of the home itself, which means you could be hit with some of the same costs as you would with a detached home.
Homeowner's Associations (HOAs). When considering the type of property to invest in, the most commonly cited pitfall for condos are HOAs. While the association maintains the property this comes at a premium that can range from several hundreds of dollars a month to nearly a thousand. The HOA can also intact a special assessment should there not be enough in the cash reserves to cover any necessary repairs to common areas. These unanticipated fees can reach into the thousands and quickly cut into profits down the road when you sell the property. Another potential downfall of condo HOAs is that they often maintain strict rules as to the changes you can make to the investment property.
While townhome and detached homes can also have HOAs, the fees tend to be lower than condos since you own the property the home sits on. As aforementioned, more of the onus of updating and maintaining the property will fall on you, but when making updates you are building equity in your property and those costs can be recouped when you go to sell the property.
There is no one-size-fits-all approach when it comes to real estate investing. How a property type will perform will vary by location. They key to investment success is to understand the market you are investing in and what you are willing to put into the project.
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