How do Townhomes Compare to SFRs and Condos as Rentals?
Toms River, NJ · Member since 2015 · 20 posts · 1 vote
As most of you probably know Condos are far from ideal as rental units because HOAs typically have far too much control and are way too expensive.
The opposite of a condo is the HOA free SFR, where you're much more free to do as you please.
But where do townhomes fit between the two? Townhomes have HOAs too, like condos, albeit a much lesser monthly due. My question however is is it common for the townhome HOAs to have limitations similar to condo HOAs? I'm specifically talking about anti-landlording rules such as owner occupant to tenant ratio rules or rules preventing you from renting your unit out until X amount of time passes.
Townhomes are not any different from Condos really. I would guess that in most states there is not much difference between the two.
Condo Association = Home Owners Association. They are the same thing. There may be different traditions for naming these in different parts of the country but I think by your state laws they are treated the same.
Townhomes may have lower HOA fees than Condo fees for an apartment with many amenities such as party room, exercise equipment, on-site management, pools, playground. Then again, the townhome HOA fees may be larger if they have amenities such as pools, playgrounds, community gates, security guards, etc...
When buying Condo or Townhome for a rental, the following are the main issues to consider before you buy:
- Does the association allow rentals (in the by-laws)?
- Are there extra HOA rental fees, deposits, or applications needed (in the by-laws)?
- Is the HOA fee reasonable from a maintenance perspective and still allows you to cash flow?
- What does the HOA fee cover for utilities (water, trash) and hazard insurance?
- Will your lender charge more interest rate or points for a Condo?
- Will your lender charge more interest rate for having shared walls?
- Is the ratio of rentals/total units low enough? Fannie and Freddie loans require < 40% if I am remembering it correctly.
- Are there too many units owned by too few owners? Lender may not loan if too few investors own most of the units.
- FHA(HUD) will not loan in an association where the association is not "FHA certified".
- Does the association board have something against landlords/rentals? They may have a plan to vote to ban rentals soon.
If we are good landlords who only rent to excellent tenants, then most associations will not cause a ruckus and change the by-laws. Where I live, all associations that have banned rentals have much lower resale values and suffered much more in the housing downturn with more foreclosures and abandoned units than associations where they allowed a certain number of rentals. Smart associations will understand that rentals do not drag down property values and in fact it helps values during a downturn.
There is currently a crackdown on owner occ vs rentals per a Broker friend of mine. That means that the MBS are looking closer at condo complexes. I do believe there is a difference in the owner occ Fannie, Freddie and FHA. Banks are more flexible with that kind of thing if they are not using a MBS.
http://fhareview.com/the-guidlines-fhaapprovalguid...
https://www.fanniemae.com/content/guide/selling/b4...
Townhomes are not any different from Condos really. I would guess that in most states there is not much difference between the two.
Condo Association = Home Owners Association. They are the same thing. There may be different traditions for naming these in different parts of the country but I think by your state laws they are treated the same.
Townhomes may have lower HOA fees than Condo fees for an apartment with many amenities such as party room, exercise equipment, on-site management, pools, playground. Then again, the townhome HOA fees may be larger if they have amenities such as pools, playgrounds, community gates, security guards, etc...
When buying Condo or Townhome for a rental, the following are the main issues to consider before you buy:
- Does the association allow rentals (in the by-laws)?
- Are there extra HOA rental fees, deposits, or applications needed (in the by-laws)?
- Is the HOA fee reasonable from a maintenance perspective and still allows you to cash flow?
- What does the HOA fee cover for utilities (water, trash) and hazard insurance?
- Will your lender charge more interest rate or points for a Condo?
- Will your lender charge more interest rate for having shared walls?
- Is the ratio of rentals/total units low enough? Fannie and Freddie loans require < 40% if I am remembering it correctly.
- Are there too many units owned by too few owners? Lender may not loan if too few investors own most of the units.
- FHA(HUD) will not loan in an association where the association is not "FHA certified".
- Does the association board have something against landlords/rentals? They may have a plan to vote to ban rentals soon.
If we are good landlords who only rent to excellent tenants, then most associations will not cause a ruckus and change the by-laws. Where I live, all associations that have banned rentals have much lower resale values and suffered much more in the housing downturn with more foreclosures and abandoned units than associations where they allowed a certain number of rentals. Smart associations will understand that rentals do not drag down property values and in fact it helps values during a downturn.
Thank you for your insight George and Marc.
Townhomes and condos are pretty similar. You have to comply with the HOA and pay it, it's not a good rental to go for. SFR or multi's like duplex/triplex/fourplexes are definitely the way to go.
Townhomes and condos have a few positives aspects too that we should also mention:
- If it is well managed and charging enough in fees, the HOA will have the cash required to replace the roof, siding, and deck when they are needed. Don't need to save as much for the eventual CAPX.
- 80% of the insurance cost is covered by the HOA and the landlord does not need to buy such a large policy.
- Don't need to worry about landscaping, lawn care or clearing snow in the winter. Covered by HOA fees.
- Tenant will find it more attractive if some utilities are also covered by the HOA.
- Tenants may be willing to pay more rent for the community amenities such as a pool or exercise room.
- Priced and designed for the first time homebuyer and empty nester, there is almost always a good pool of people who will buy it from you when you want to sell it.