Townhomes and condos vs. stand alone single family?

Question

Are townhomes and condos good for starting out or is it harder to get cash flow and appreciation compared to stand alone single family property? The prices in my area are much more approachable for the former

Theresa Harris · Answer

There are pros and cons to both. You have a lower entry point for condos and townhomes, but you also have condo boards that set the rules which can change and you have condo fees and special assessments. Some condo boards are good and do a good job (with the management company) of running things, others are horrible at handling the finances. The condo fees could pay a good amount of a mortgage payment.

With a single family, if the roof goes, you have to pay to replace the whole thing while in a townhouse or condo that is control by the condo board and, if they've budgeted properly, comes out of the reserves from the condo fees.

A few years ago when I was looking for my last place, I ran the numbers on a higher end condo ($250K in my area, $215/mnth fees) vs a 15 year old starter home ($280-300K). We estimated the difference in rent was about $100 a month. Both would cash flow about the same, the only difference was with the house more of the rent went to paying down my mortgage and with the condo that extra went to paying condo fees. I bought the house even though I had to come up with a bit more for the down payment. We ended up renting it for more than expected, so I came out even further ahead.

Tim Swierczek · Answer

I'm also invested in both Minneapolis & St. Paul. I prefer single-family homes and duplexes to TH or condos. I prefer to avoid the HOA because I can find cheaper ways for the services they provide, and you give up control of exterior projects and must follow their rules, which can be counter to your mission. That said, I had lunch today with a friend who retired from investing in THs in Woodbury so that you can make money on either investment. I would consider what level of involvement you want and, more importantly, where you can find the numbers will work better.

Eric Gerakos · Answer

I have done very well with condos but it depends on how the HOA is run and HOA fees.

Russell Brazil · Answer

Condos generally dont appreciate as well. But they are how I got my start largely.

James Hamling · Answer

@Kiersten Hegna First of all condo's and townhomes are VASTLY different things, and should not be lumped together at all.

I won't touch condo's with a 10-foot-pole for LTR. Or STR for that matter.

But Townhomes and their HOA's, love-them! Townhome out perform stand alone single family residence in every metric. They are easier to manage, easier to upkeep, better profit margins etc etc..

Townhomes work best in the extremes of a market. Extreme up's, extreme downs, extreme swings etc etc.

What I commonly hear novices argue is the HOA fee, that the fee is "bad" and hence why they don't like them. Or rules. Ok, so keep in mind, when doing things for Rental Purposes we WANT rules, do we not? So HOA rules are a GOOD thing not bad, we want rules. And what's even better than rules is when they are someone elses! We get to lay blame on other "oh, sorry, can't have 4 pet's sorry, wish I could help, out of my hands, HOA rules, I have to evict you if you did that, sorry"!

Now onto HOA fee. Generally the HOA fee covers; lawn, snow, trash and all exterior maintenance and hazard insurance. Go ahead and pick any stand alone SFH and do that math, how much would it cost for lawn service, snow service, sprinkler system service, the water, trash etc.. In most cases it's about double what the HOA fee is. I call that a profitable spread. Because remember, as a rental, all those are features and amenities meaning we can charge $ for those to tenant.

In townhomes we get the guiding psychology from it being a community, with community rules. Tenant "get-it", it's a social construct ones doesn't have to fight to get through to a normal person. Now in stand-alone SFR's, it's an item we have to condition into a tenant because the experience is of "theirs" and too often, treat it as such.

Condo's, I hate them because they go a step too far in it all. Generally the associations are way too much in your business. Often they require submittal of a lease for their review and approval, or denial. They can have a meeting and change rules rapidly, including banning rentals. HOA's in theory can do the same but it's a lot harder to do in an HOA vs condo association.

There is a long list of pro's and the only con's I have found in a touch over 30yrs in townhomes is if the HOA sucks, and if the HOA sucks, you don't buy there, simple. I never have to guess about anything exterior, that's half my issues off my plate.

But again condo's, no thanks, I'd need to get it for near free to deal with that drama-factory.

Eric Fernwood · Answer

Hello Kiersten,

The goal of real estate investing is not to own a specific property type. The goal is to have a property that consistently generates a reliable income. This can only happen if the property is consistently occupied by a reliable tenant. A reliable tenant is someone who:

• Has stable employment in a market segment that is stable and likely to improve over time
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

And, over the years you will own the property, you will need multiple reliable tenants. To increase your chances of always having a reliable tenant, purchase a property that attracts a tenant segment with a high concentration of reliable tenants.

How do you find a tenant segment with a high concentration of reliable tenants? By interviewing multiple property managers. If you or anyone would like sample interview questions, DM me.

Attracting a Specific Tenant Segment

All people who rent are not homogeneous. There are many segments and each segment has different behavioral characteristics and different housing requirements. People will only rent a property that meets all their housing requirements. Therefore, if you purchase a property that matches a specific segment's housing requirements, you can expect most applicants to come from that segment.

How do you determine the housing requirements of a segment?

When you identified a tenant segment with a high concentration of reliable tenants, you also learned what and where they are currently renting. You can then define the four components of a property profile.

• Location - The locations where significant percentages of the target segment are renting today.
• Property type - What are the type(s) of properties are they renting today? Condo, high rise, multi-family, single family?
• Rent range - What the segment is willing and able to pay.
• Configuration - Two bedrooms, three-car garage, large back yard, single-story, two stories?

Once you have a property profile, you can give it to any realtor and they can find conforming properties. However, there are additional considerations for any property under consideration:

• Time to rent
• Renovation Cost & Risk
• Initial ROI and cash flow
• Purchase Price
• Maintenance Cost
• Acceptable area rental restrictions

Summary

If you follow the process of:

• Identify a tenant segment with a high concentration of reliable tenants through property manager interviews
• Create a property profile based on where and what the target segment is currently renting.
• Provide the property profile to a realtor who will find conforming properties
• Evaluate each property based on the additional considerations

You eliminate all guessing and your odds of buying a performing property are high.

Kiersten, I hope this helps.

…Eric

Gustavo Delgado · Answer

As an owner of condo rental and sfh. I would not go to condos anymore unless you can pick one up at a very low price. They appreciate much slower and that damn HOA will eat up you cashflow. You have less control of your and hopefully there is a solid management company and board of directors. They can make or break you.

Florencia Cafure · Answer

It really depends on the area. I have been having a different experience

Scott E. · Answer

I would never buy a condo or a townhome unless I was looking for a retirement "lock & leave" type property that had little to no maintenance.

It's possible your market is different but in my market, condos/townhomes don't cash flow, and they don't appreciate.

Not exaggerating on the appreciation either. The price history on some of these condos is mind boggling. 10 years ago they were trading for almost the same price as they are today. When accounting for inflation, you're losing money on that deal.

Bryon Andrews · Answer

The key is to take action and get started. Look into what your strengths are and leverage those strengths. If you don't know your strengths, a great way is to learn by doing and surround yourself with people who are willing to help.

If looking out of state, do you have the advantage of someone you know like and trust with boots on the ground to help you, or are you going to build your team once you find a deal? There are opportunities everywhere, both SFR and Condos/TH can provide this.

Like @Russell Brazil said, condos generally don't appreciate as well and that is true from my experience in the Twin Cities. I am not saying that they are a bad investment though. All depends on what your goals are with investing.

Townhomes and condos vs. stand alone single family?

Townhomes and condos vs. stand alone single family?

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Attracting a Specific Tenant Segment

Summary

Attracting a Specific Tenant Segment

Summary