Is Building a Townhouse a Good Investment?

There has been a significant shift in Australia's homeownership market in recent years, as I'm sure you've noticed. Gone are the days of 2.4 children and the white picket fence. Nowadays, more and more are choosing to invest in townhouses instead, and there are many reasons why.

The most notable is their relative affordability compared to houses and a shift in demographics- people are having children older, having less of them, and prioritising a low maintenance lifestyle with closer proximity to amenities and the workplace.

But are townhouses a good investment?

As well as your overarching investment strategy, your plans for the house will decide whether you choose to make your investment here (as opposed to a house or an apartment).

This blog will walk you through its pros and cons.

Pros:

The cost

We've already touched on this in our introduction, and it's the key driver in the decision-making process for many property investors.

Townhouses are generally cheaper than houses, making them a popular and affordable entry point into the market for young families, professional singles or couples, and downsizers.

They offer a favourable trade-off between the benefits of a house and an apartment- cheaper than detached houses but bigger than apartments.

Lower up-keep

The smaller size of a townhouse compared to a house is reflected in its lower maintenance costs. Their yards are often simpler and smaller too- cost-savings that add convenience and appeal, especially if you plan on listing on the rental market.

Market appeal for tenants

We have touched upon some of these points above: the lower maintenance, proximity to amenities and modern designs of townhouses attract quality tenants and give the properties high tenant market appeal.

Of course, local markets can vary, so you still need to do your homework on their respective supply and rental rates.

Common property depreciation

Townhouse investors can claim depreciation on a property and its assets: the structure, fixed assets and other assets they own in the property, i.e. kitchen appliances. Everyday property items can be claimed for too- such as garbage bins, security cameras and any driveways that link the townhouses.

Privacy

Although they often now come with common amenities (swimming pools, parks etc.), they don't have any shared living areas, so they boast much of the same privacy of the house.

Space

Townhouses are often split into 2 or 3 floors, offering more space than most apartments.

Modern amenities

With the explosion in their popularity as a relatively modern development, most come with the trappings of modern conveniences, such as ensuite bathrooms and open-plan living.

More relaxed bylaws

While townhouses still need to adhere to local bylaws, these do tend to be more relaxed than those for apartment buildings, and it's less likely you will have to pay body corporate fees.

Cons:

You're part of a strata scheme

As part of a strata scheme, there are restrictions on how you can update the property- you'll need to get any improvements approved first. However, this isn't so much of an issue if you are investing as a rental property, as simple repairs are usually fairly plain sailing through the strata approval process.

Lower rental returns

Townhouses often have lower rental yields than freestanding homes, though the lower purchase price and maintenance costs counterbalance this. Still, it would be best to size up these factors when choosing where to invest.

Resale values

Historically, the capital growth of freestanding houses exceeds those of townhouses. Though these market waves are also subject to fluctuation, so there are other things to bear in mind before you invest- specifically, where these lie when you are looking to buy.

Space

Townhouses usually have smaller square footage and outdoor space than freestanding houses.

Price

Although cheaper than a detached house, townhouses are often more expensive than apartments.

Less individuality

The nature of townhouses means they are often built with the same layout and design as neighbouring buildings and are less bespoke than a house.

Stairs

Usually over 2 or 3 floors, townhouses may not be best suited for the elderly or people with mobility issues.

Conclusion:

Whether a townhouse is the best investment property for you will depend on several factors, such as your budget, what you want from the investment (rental yield or capital growth), if you are planning to be owner-occupiers or landlords, and current property market conditions.

But with the changes in the composition of society, our habits and our demands, their popularity as living spaces certainly show no signs of abating.

If you do choose to make your investment in a townhouse, here are a few things you should prioritise:

1. Proximity to local retail, public transport, schools, and parks.
2. Versatile floorplans that cater for downsizers, families, or young professionals.
3. A design that lets in lots of natural light to living spaces and bedrooms.
4. Lots of storage space and options.
5. What common facilities it has, and whether they appeal to you or prospective tenants.
6. Whether the type of title (strata, community or freehold) suits your investment needs.

A final word of advice is to check whether the advertised price of the house and land packages is up to 'turn-key' standard, to ensure there are no hidden surprises and extra costs with landscaping etc.