Taking on the opportunity to invest in real estate requires a lot of planning and research. With so many different types of real estate to invest in, you may not be sure where to begin. Maybe you have limited funds to put down on your investment and need to look for a property that is at a lower price point but not in need of many repairs or renovations. Maybe the area you are in is better suited for multi-family tenancy. Or, maybe you just want a property with less maintenance, if so, a townhouse or condo may be your best bet. But, what is the difference between the two? Which will bring in a better return on investment? Let’s break down each of the pros and cons to help you make a decision. 

What is the Difference Between a Townhome and a Condominium?

The most apparent difference between a townhouse and a condo is in its structural management and appearance. There are other differences that you as a property owner and landlord should also be aware of such as taxes and HOA rules and regulations. 

What is a Townhome?

Townhouses are free-standing and look like small houses. They are often multi-level and placed in rows. They don’t have any units above or below them but will probably share walls with other units. Typically, townhomes do not have much yard space except for a small patio. Common area maintenance is paid for by a homeowner’s association, but the owner is responsible for paying property taxes. 

Tenants who do not have the time, ability, or desire to maintain a single-family home, but do require more space than an apartment can provide, may look for a townhome to rent. Often, townhomes are in more suburban areas and further away from amenities like public transit and entertainment which could be a positive for someone who enjoys peace, quiet and privacy. 

Pros of a Townhome:

• Townhouses are more spacious than apartments. They can be multi-level and have an outdoor space.
• Townhouses have less restrictive and less expensive bylaws than apartments.
• Townhouses generally appreciate in value faster than condos which will allow you to gain equity more quickly to either sell your property or cash in on the equity to purchase another property. 

Cons or a Townhome:

• Townhouses tend to have a higher purchase price than condos which will require more money out of pocket for your down payment. 
• Townhouses may have multiple stories, making it unsuitable for elderly or disabled owners, thus limiting prospective tenants. 

 

What is a Condominium?

A condo is a self-contained unit that is part of a large complex and shares walls with other units. You will likely have neighbors above and below you with no yard space. Residents own and care for their unit’s interior, but not the grounds the unit sits on. A homeowners association takes care of all common areas and the exterior of the unit which makes your number of responsibilities and worries smaller. Condos are often confused with apartments and really the only difference is that condos are individually owned.  With an apartment, one owner owns all the units in the complex and manages them. 

One of the most significant benefits of owning a condo is the lower purchase price and a more convenient location. This is ideal in attracting tenants, especially those in the young professional demographic. Apartments are most often located in densely populated areas, close to public transit, entertainment, and so forth. Most complexes also have excellent amenities like resort-style pools, gyms, and meeting spaces for social gatherings. 

Pros of Condos:

• Condos are easier to maintain since the homeowner’s association handles exterior repairs and maintains the common areas.
• Condos have added amenities. Tenants can enjoy amenities such as gyms, pools, and tennis and basketball courts which could be beneficial in attracting a tenant. 
• Thanks to their location and amenities, condos usually do not sit vacant for long periods of time after tenant turnover which is great for you as the investor. 

Cons of Condos:

• Condos are usually smaller and include less space which may be a turnoff for some tenants. 
• Condos have expensive association fees to cover the cost of the amenities. However, the amenities in apartments are usually better than townhomes and can even resemble a resort-like experience.  
• Apartment bylaws dictate whether you can have pets, where you can park and what renovations you can do, which may deter some prospective tenants from wanting to live there. 
• Condos do not appreciate in value as quickly as a townhome does and tend to take longer to sell. 

 

Time to Think Like an Investor

Since this is an investment property, you need to put emotions aside. You will not be living here, so don’t think about what you want. You will need to look at numbers and your potential for positive cash flow. You need to make sure that the amount of money you charge in rent each month will cover all of your property related expenses which include more than just the mortgage payment on it. 

Here are a couple of factors to consider:

Taxes

Townhomes typically have a higher property tax rate than condos. This is because both the interior and exterior of the property are insured where a condo only the interior is the owner’s responsibility. 

HOA Fees

Condos tend to have a higher HOA fee, and it is common to see this fee go above $350 per month. The amenities and maintenance perks arguably make this fee worthwhile. Again, you will have to run the numbers to see if the amount you charge in rent will sufficiently cover these additional fees. 

Financing

If you need to obtain financing to purchase either a townhome or a condo, the process may not be that easy. Lenders will look at the homeowner’s association that governs the unit to see if there is a high delinquency rate or any pending or current litigation. If either of those situations is occurring, you may not be able to receive funding for that property. 

Restrictions

Before purchasing any property, make sure the HOA does not have restrictions on rentals. Some may not allow short-term rentals, and some may require the unit to be owner-occupied. 

Failing to investigate this could be devastating to your finances!

Which is the Better investment?

At the end of the day, this question can only be answered by assessing your long term goals. What do you want out of this investment? Ultimately, the key is to calculate which property will generate a better long-term return. This will eventually be the best investment and varies based on your location, current market predictions, and strategic growth plans in your desired area.