Why Multifamily Homes are a Sweet Spot for Investing
Updated: Feb 25, 2020
Pros and Cons of Investing in a Townhouse or Duplex
A townhouse is generally defined as a conjoined unit owned by individual tenants and usually shares at least one or more walls with other tenants. A duplex unit will only share one wall with another duplex. Both of these are considered a multifamily home. Owners in townhomes and duplexes have neighbors on one side or possibly both sides, but never above them like they would in an apartment.
Whether you’re thinking about investing in a Whistler ski-in, ski-out townhouse, with most listed for well over a million Canadian dollars in 2018, one of the Vancouver townhouses for easy access to British Columbia’s largest city or somewhere else, doing so comes with a number of pros and cons, including these.
Cost. Real estate investors can usually find townhouses for sale that are less expensive than single-family homes as they’re cheaper to build and are less in demand. It’s possible to save on maintenance costs as well, if the townhouse is part of a homeowners’ association as some HOAs cover grounds maintenance costs for shared areas. That means you’ll end up paying just a fraction of what you would have paid if you invested in a single-family home or another type of house. The purchase price of a townhome or duplex compared to a single-family home of similar size will be much less. However, the rent for a similar size townhome or duplex compared to a single-family home is very comparable. Thus, a townhome or duplex is an ideal purchase for an investor. It will have a much lower upfront cost but similar rent to a comparable single-family home. This means your return on investment (ROI) will be much higher on a muiltifamily unit.
Amenities. Many townhouses will have amenities similar to apartment complexes, such as a playground, clubhouse, tennis court and swimming pool that can make them more attractive to renters.
Location. Townhomes and duplexes are usually located in or very close to a city, providing tenants with the opportunity to live close to work, shopping, cultural attractions, schools, hospitals and so on. Between the location and amenities, it can make finding good tenants much easier when you invest in a townhome or duplex.
Financing Difficulties. Investors who seek financing for their townhouse purchase may run into some hurdles, as compared to obtaining a mortgage on a single-family home. That’s because lenders have difficulty accurately appraising and classifying them, making financing pricier and more restrictive. Some lenders decide to underwrite them as if they were condos which leads to higher costs. They may place restrictions on the number of units that can be rented rather than occupied like they do with condos, and the homeowners’ association may do the same, which can make it important to learn how many units are rented vs. occupied by their owners.
The bottom line is that when investing in a townhouse you’ll likely face more restrictions along with a more expensive mortgage. We have personally purchased one townhome and one duplex with no problems but the potential for problems can be greater with a multifamily unit.
Slower Appreciation. Townhouses don’t appreciate as quickly as many other properties like single-family homes, primarily because they don’t have as much land. Most property investors look for investments that they known will increase in value when it’s time to sell so that they’ll make a profit. If that’s your goal, investing in a townhouse may not be the best idea. It can, however, bring in rental income that can make that investment worth it. Although a multifamily unit might appreciate more slowly than a similar single-family home it will appreciate. Our townhome and duplex have both appreciated nicely over the past several years and are on par with single-family appreciation in our area. Appreciation rates might vary according to your area and it's something to consider when you purchase a property.
Privacy. A lack of privacy can be an issue when looking for good tenants. Purchasing an end unit where your tenants don’t have people living them on both sides of the unit can help negate that.
Higher Turn Over. We have found the biggest con to purchasing a muiltifamiily unit compared to a single-family home is that tenants move out more often. We owned a single-family home for 6 years and only rented it to 2 tenants; each for 3 years. Our townhome and duplex units have seen new tenants every year on average around the time their first lease is up. This means more work for us re-renting the unit but the cost savings on the purchase price far outweighs the higher turn over rates for us.
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