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Saturday, October 01, 2005

Would a townhome make a good investment?

I have been watching the real estate in the area that my house is located in. I am currently renting a room from a buddy of mine and I don't have any weekend home improvement projects to work on. I'm getting bored.

If I can find a property that I think is attractively priced, has some remodel potential, and may make a potentially good rental property I might bite. A friend of mine lives in a townhome in this area and recently found out that one of these townhomes may be going on the market. So how would a townhome compare to the single family home I am looking for?

Lets take a closer look at the potential for these properties.

I am looking for a particular house - 3 bedroom, 1.5 BA, single family ranch (common in the area). Two of them which are now under contract, recently were listed at $188,500, and $194,500. This is the same type as my other house - I think they have great remodel potential and are very rentable in my opinion.

The townhouses that may be sold are 2 bedroom, 2 story, 2.5 BA brick townhomes, with about the same square footage as the 3 bedroom house. They are definitely more spacious, but that isn't a big concern of mine - infact I think that may be a hindrance because I don't think the rent increase corresponds favorably to the extra square footage.

The 1st things that jumps out is the price of the townhomes - here is the sales history for the community for the last 2 years:

2/2005 $148,500
12/2004 $158,000
11/2004 $168,500
7/2004 $155,500
7/2004 $146,500
9/2003 $153,000
7/2003 $150,000
5/2003 $144,500
3/2003 $155,000

I actually haven't examined each of these property yet but I believe they are all 2 bedroom, 2.5 BA but some have large sunroom areas on the side hence accounting for some of the variance in price. Regardless the range on these townhomes looks to be $145,000-$165,000. For purposes of my analysis I am going to assume a purchase price of $150,000 which appears be a reasonable price.

I think I could rent one of these townhomes for $950-$1000/mo. They are about 20 yrs old so a little work on the inside will go along ways to making them look attractive.

The house I mentioned above I am looking for would probably end up costing me about ~$200000 after remodel expenses. I think I could rent on of them for $1300/mo after I finished the remodel.

So which is a better investment?

Taxes, insurance, mortgage, etc all being equally proportioned to the purchase price the return would be nearly identical. The townhomes would need less work, which due to time limitations at work, and a chance of relocating for a temporary assignment in the near future, is a factor. I believe the single family homes edge out on the price appreciation.

However, here is the standout - the area the homes are located in there is no homeowners association. The townhouses, since they have maintenance free exteriors, have a $150/mo fee. Wow - that kills it right there. It doesn't sound like a lot of money, but I think that fee turns these townhomes into a lousy investment. That is a net $54,000 in fees over 30yr (not including any investment returns). I could hire a lawn boy for $50/mo, replace the roof and buy vinyl siding and still come out ahead.


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