Pros and Cons of Investing in Condos, Townhouses & Detached Homes

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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Top 5 Secondary Cities for Real Estate Investing

Gateway cities like San Francisco and New York have long been​ ​favored by​ ​real estate investors​, because they are fairly recession proof and tend to be insulated from job loss and declining property value during economic strife. They have continued to garner interest in recent time because of the trend towards urbanization ​​as Millennials delay purchasing homes and moving to the suburbs. But with supply constraints and demand hitting peak levels in these markets, the yields from these investments are on the decline. So, investors might find that the grass is indeed greener elsewhere.

A report from PwC and Urban Land Institute has declared secondary cities one of the top real estate trends of the year. These markets ​include cities like ​Denver, Nashville and ​ ​Raleigh-Durham​ and are ​characterized by​ ​above-average population growth, a flourishing economy and a lower cost of living and lower cost to do business than other large metros.​ ​

Many of these areas have benefited from revitalization of downtown areas where restaurants, bars and mixed-use development have moved in. Nicknamed 18-hour cities, these burgeoning markets offer the ​amenities of major cities,​ but​ they don't operate on a 24/7 schedule like their larger counterparts. For those looking for the urban lifestyle at a reduced price, these cities have become a good layover point between gateway cities and the suburbs.

Secondary cities have also become attractive, because they have experienced a lot of job creation. Companies are increasingly considering these markets, because it is cheaper to establish a presence and run a business than in the largest cities. As this trend continues, it will feed the overall growth of these markets, making them an even more attractive investment opportunity.

​​​Investing in 18-hour cities is not without risk though. ​In the past, secondary markets have not been as resilient in economic downturns as gateway cities. ​It is not understood how these booming markets​ of today​ would perform in the event of another recession,​ ​so​​ ​they could be vulnerable to massive job loss and/or plunging property values​ ​i​f​ ​another economic ​decline​ were to occur​​.

But analysts have reason to be optimistic about secondary cities going forward. During the current period of expansion, there has been self-restraint in adding new supply to these real estate markets, which means the population explosion in 18-hour cities will be able to absorb ​the supply on the market. ​​Also, unlike its gateway counterparts, secondary cities still have room for expansion​, so they can maintain equilibrium between supply and demand. ​​As a result, cap-rate compression (i.e. the ratio of net operating income to property asset value and often a predictor of how profitable a property will be) has been able to stay at moderate levels, which translates to higher yields for investors.

In PwC's report, it looked at the most attractive ​real estate ​markets​ overall​​ and much of the attention centered around 18-hour cities. While the the big six cities continue to be of interest to investors who enjoy the security of those markets, increasingly investors are more willing to take calculated risks with emerging cities. As a result, only two of the top 10 cities (San Francisco and Los Angeles) were not secondary cities. As you consider investing in these alternative markets, here are some to consider.

Dallas/Fort Worth ​- ​With strong job growth and good cost of living and cost of doing business, Dallas/Fort Worth ranks as the top area for real estate investing. There is some concern about overbuilding, but the consensus is that the ​current ​market can support it.

Austin ​- A longstanding favorite, Austin continues to prosper from diverse job creation in STEM and technology, advertising, media and service jobs. The one downside cited is that the infrastructure has not been able to keep pace with the population explosion.

Charlotte​ - ​Continued job growth coupled with the development of urban centers have allowed Charlotte to continue to thrive. Some point to the city's singular focus on the financial services industry as a potential detractor, as it may not allow for the same growth as technology-​centric markets. ​ ​

Seattle ​- Popular with both domestic and global investors, ​Seattle has benefited from growth in diverse industries. While investors note that the city has been able to maintain growth for some time, there are limited development opportunities and some worry it might not be able to sustain its current pace of growth.

Atlanta​ - ​The lower cost of doing business in Atlanta has attracted corporate relocations has contributed to strong market growth in the city. Its biggest shortcoming is the "perceived accomplishments of public and private investment.​"​

While 18-hour cities have traditionally been a riskier investment, they are beginning to write a new story. As they continue to diversify their economies to include the tech and healthcare industries as well as develop mixed-use communities, they are becoming an increasingly more stable investment. And for those looking for bigger yields, these cities could prove to be very rewarding.

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What Rehab Renovations Deliver the Highest ROI

As an investor you have to be thoughtful about how you spend your money on renovations when fixing and flipping​ a house​.​ Budgets are not endless, and you do not want to risk investing more into a property than it is worth. So, it is important to hone in on projects that will add the most value for the least amount of work and cost. As part of the process, take time to research comparable homes in the neighborhood and see what amenities are common and contributing to high resale value.

​Additionally, the ​changes​ you make to a property should be about ​updating the space not about reflecting your personal tastes. A neutral palette will create an environment ​where a buyer can envision how he/she can put his/her personal stamp on the property. ​​Also, be ​cognizant of making​ adjustments that are too ​trendy and that may not age well. This is​ often​ referred to​ as​ stylistic depreciation, and it can ​unknowingly impact your bottom line. ​

To make sure that you get the most out of your fix and flip renovations, here are the ones that deliver the most value.

Kitchen. The kitchen is a gathering place in the home, making it a major focal point. As a result, homebuyers place a big emphasis on this room when purchasing​ ​a new home, which makes it a worthwhile investment when fixing and flipping a property. A kitchen remodel can be a costly endeavor, but​ cosmetic updates like refinishing surfaces, upgrading ​to stainless-steel appliances and installing new light fixtures can go a long way with buyers and have minimal impact on your budget. According to Remodeling Magazine's Cost vs. Value report, minor kitchen remodels​ ​recoup 83.1 percent of the investment as compared to 64.9 percent for major kitchen remodels.

Bathrooms. When it comes to prioritizing rooms to refresh, the bathroom​ ​is a close second​ ​to the kitchen. In particular,​ ​buyers are most concerned with the master bathroom​, and​ a facelift to this room can yield a​ ​65.7 percent return-on-investment.​ ​But as with renovations to the kitchen, use your budget​ ​on superficial changes versus major modifications to the layout.​ ​When making updates to the bathroom, select classic features like off-white tiles and neutral paint that will appeal to a wide-range of tastes. Also, jacuzzi bathtubs that were so popular a few years ago have fallen out of favor with most buyers​​.​ So, instead of splurging on big upgrades like that use your renovation budget to replace the fixtures and the toilet, which will provide the highest yield for minimal cost. ​

Curb Appeal. ​First impressions are everything, and a potential buyer will form their opinion of a property in a matter of seconds.​ ​That said, one of the most important investments you can make is​ ​to​ ​the exterior of​ ​a home​.​ ​Fortunately, there are many cost-effective ways to improve curb appeal that can have a big payoff. For one, a manicured lawn with attractive landscaping can be a low cost way to ​bring​​ vibrancy to a property and can add 28 percent to the overall home value. Another way to ​increase the market price of a home is by cleaning its exterior. ​Renting a pressure washer is relatively cheap, and giving the house a good scrub down can add $10,000-15,000 to the sale price, according to REALTORS. ​Depending on the condition of the facade more measures may need to be taken, but even costly upgrades like replacing the siding can deliver a 77 percent return-on-investment. ​

Energy Efficiency. Homebuyers looking for ways to decrease the amount of money being spent on utilities are increasingly prioritizing energy efficiency over luxury features. Studies have found that buyers are paying 10-14 percent more for houses with green certifications than for comparable homes without. While many energy efficiency ​projects take years to recoup the investment, there are some projects that will yield high returns on closing day. Remodeling Magazine found that insulating an attic had the highest return of any rehab project, coming in at 117 percent.​ The cost of replacing windows can be a deterrent for many investors, but it is one​ of the most worthwhile upgrades you can make. For average-quality vinyl windows, you can recoup 80​ percent​ of the project cost in added home value​, according to the National Association of Realtors. ​If you are still not convinced, keep in mind that homes with sustainable features also have the added benefit of having lower holding costs.

When fixing and flipping a property, the end goal should always be about making the best looking and most functional property with the least amount of capital expenditure. Contrary to popular belief, big renovations do not always deliver the most value. Often times, minor upgrades that take little labor or financial investment can have the best payoffs. So, with a little research and a little elbow grease, you can get high returns on your next fix and flip project.

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Hidden Costs of Real Estate Investing

When selling an investment property, there can be a big difference in the price it is sold for and the amount you actually take home. There are costs inherent to real estate investing, and many cannot be avoided completely. But in being aware of them, you can plan and identify ways to minimize the impact they have on your take home. Here are a few common hidden costs to prepare for as you begin any investment ventures.

Carrying costs.​ The expenses associated with maintaining a property are known as carrying costs. Typically, these will include your mortgage, property taxes, insurance, utilities, maintenance (e.g. repairs, lawn care, etc.) and homeowners association fees. Considering all these costs, a protracted selling timeline can greatly diminish your return on investment. For every month that your house goes unsold, you will be responsible for these fees, and they will come out of any potential profits when it is finally sold. Understanding your carrying costs will help you determine a list price that will make you competitive so that your property doesn't languish on the market while you accumulate ​fees.

Commissions. ​A realtor only gets paid once the transaction closes. In most cases​,​ the seller is responsible for paying commission to their agent as well as the buyer's agent. When divesting a​ investment ​property, ​you should plan on paying 5-6 percent of the home's sales price in ​commissions, which will be split between the two realtors. There are ways to minimize the impact commissions will have on your bottom line. For one, you can pass along the costs to the buyer by incorporating the fees into the list price. Also, sometimes you can negotiate lower fees with a realtor, particularly, if both the buyer and seller are being represented by the same agent, which is known as dual agency. ​Finally, if you plan to invest in real estate on a regular basis, it might be in your best interest to get your license as a way to reduce the commissions being paid to other people.

Capital Gains Taxes. When you sell a property for more than you paid and invested in it, ​the profit is called a capital gain, and you should plan to report it on your taxes. The rate at which you are taxed will depend on whether the property was a short-term investment (i.e. under one year) or long-term (i.e. more than a year). The tax laws favor buy-and-hold strategies over quick flips, so you should anticipate paying higher taxes for the latter. You may be able to defer capital gains if you use the profit to reinvest in a more valuable property. A financial planner and/or tax expert ​can help you understand the nuances of the tax codes and state laws, so that you have a sound strategy in place.

Real estate need not be a money losing proposition. By having a firm grasp on all the costs associated with an investment, you can avoid potential surprises and maximize your return-on-investment.

The Impact of Urbanization on Real Estate

The American Dream used to constitute getting married,​ moving to the suburbs and buying a single-family home​ for a growing family​. But today's generation has forged a new path. For the first time in history​, ​more than half of the world's population resides in cities. The ​UN Department of Economic and Social Affairs expects that 66 percent of the population, or 2.5 billion people, will reside in urban areas by 2050.

​As young people finish school, they are increasingly delaying marriage, kids and mortgages, which had been seen as a rite of passage into adulthood for previous generations. Instead, they are flocking to cities in record numbers in pursuit of career opportunities and a better lifestyle. ​ The resurgence of cities as an economic center at the beginning of the century has made them a beacon for highly skilled jobs ​with better pay and benefits than those found in the suburbs. ​These thriving city centers also offer urbanites the ability to live, work, shop and entertain in close proximity, satisfying their desire for shorter commutes and greater walkability. Research from Nielsen revealed that 62 percent of Millennials prefer to live in mixed-use communities found in urban centers.

The predilection for greater amenities and community style living has made apartments more attractive than they have been to previous generations, so Millennials are increasingly swapping mortgages for leases. As a result, the demand for apartments has been strong, and in the last five years rents have increased 20 percent nationwide.

Despite the current push towards cities, the suburbs aren't completely out of fad. Many ​experts suppose that the deferral of marriage and children has only caused Millennials to put off moving to the suburbs and buying a home. Over time as this generation begins to age, they too will seek greener pastures in the suburbs.

That said, urbanization has had an undeniable impact, and the suburbs are being reimagined. In an effort to bring urban sensibilities and conveniences to these residential areas, there has been a rise in mixed-use developments. These communities allow for better access to amenities that younger generations crave.

A survey by the National Realtors Association found that 48 percent of people would ​rather live in communities​ with ​small yards but within walking distance of amenities than live in communities with large yards but they have to drive to all amenities.

As urbanization continues to take hold and drive demand for real estate in cities, analysts believe in the short run that investors and developers in the rental housing sector will be at an advantage.​

For those looking to infiltrate the market, it is important to remember that although properties in cities can be a profitable investment not all are created equal. When looking for investment opportunities, identify areas where housing affordability is a barrier to homeownership. In cases where rent is high compared to asking prices, the investment could be lucrative. Also, keep in mind that prospective renters value walkability and access to public transportation. So, look for neighborhoods that are close to bus stops and innovation hubs with high job growth.

Urbanization is changing real estate as we have previously known it in cities and the suburbs. And with a smart investment strategy, it could be a big boon to investors.