Thursday, October 19, 2017

Investor Debate: House vs. Townhouse vs. Condo

                                                                                                 By Urban Upgrade
There are a number of advantages to investing in real estate, especially if you choose your properties wisely. We work with many types of investors and often get asked whether it is best to buy into the single family, townhouse, or apartment markets - the truth is that each comes with its own advantages and disadvantages, so there often is no simple "right" decision that works for everyone.  
Below, a good old fashioned pros and cons list to help to outline the main benefits and drawbacks for each type of rental property:
  1. No Condo Fees: Owning a single family home, be it a detached home or a semi-detached home, means no condo fees, which means that monthly overhead is reduced, allowing for better cash flow and more money in your pocket.
  2. Tenants Pay Utilities (Usually): In single family rentals, most often utility costs are the tenant’s responsibility, although with some suited homes, and many executive rentals, these are included for convenience. With utility costs covered by the tenant, monthly carrying costs are more predictable, and generally lower anyways - most renters pay closer attention to utility usage when they are footing the bill!
  3. Higher Stability for Resale: This is true in the current market at least, but may not necessarily hold true in the long run. While it can be slightly more difficult to market a previously rented property (especially if you had careless tenants), right now single family homes are simply selling better than condos in Calgary. In fact, in some inner-city communities, single family homes on larger lots (50-ft +) are extremely coveted, and selling very quickly.
  1. Seasonal Upkeep: Your tenants may not consistently shovel the walk, or mow the lawn. With careless renters, a previously well maintained home can quickly turn into an eyesore, leading to neighbour complaints and fines from the City. 
  2. Exterior Maintenance: As the Landlord, this often falls under your jurisdiction. Fixing downspouts, repairing broken gates, painting trim and windows (all of the things you hate doing at your own house…) multiply it by two because this is your responsibility, not your tenant’s. 
  3. Repairs: Once again, all repairs are 100% yours to pay for, out of pocket, and completely your responsibility to source, manage and coordinate. If you go this route, make sure to budget money every year for minor repairs and upkeep, and allocate some funds for larger ticket items like furnaces and roofs… It is important to keep the house in good working order, when it comes time to find new tenants OR to sell. 
  4. $$$$: Generally, this is the most expensive market to buy into, meaning the purchase cost will be higher initially, and you will need a larger down payment.
  1. More Attainable Price Point: Typically, townhomes are less expensive to buy than a single family homes, meaning more cash in your jeans, and likely a more attractive rental price to prospective tenants. 
  2. Less Exterior Maintenance: Most townhomes include landscaping and snow shovelling, meaning you don’t need to rely on your tenants to be responsible with respect to this. 
  3. Lower Condo Fees: Condo fees are usually less than in an apartment condo and typically cover professional management and maintenance which makes your life easier as a Landlord.
  4. Less "Large Ticket" Expenses: Condo fees also typically cover building insurance and reserve contributions, meaning your insurance costs are much less every month, and there should* be money for large repairs when they come due. (*Just because there should be money for large repairs, doesn’t mean there will always be enough - Just as you would for a single family home, expect the unexpected and budget some funds for larger repairs.)
  1. Condo Fees: Wait, but weren’t the condo fees just listed above as a “pro”? Yes. Although generally lower than apartments, there are still condo fees, and condo fees do have a risk of rising over time. 
  2. Risk of Special Assessments: If a large repair is required, and there isn’t enough money in the reserve fund to cover, there is a chance that you will see a cash call from the condo board. 
  3. Bylaws: Most townhome dwellers appreciate the private entrances, courtyards, and ease of pet ownership. That said, all renters must follow the bylaws or the owners can get fined, so you need to ensure that these rules are understood. Not all complexes will allow pets without board approval. 
  1. $$$$: Generally the most affordable option, allowing you to get in to the investment market without breaking the bank.
  2. Less Responsibility: Generally, investing in an apartment/condo requires very little maintenance from the owner (you). The building generally takes care of anything outside the unit, and often will take care of a few items inside like smoke alarm tests and filter changes. 
  3. Utilities May Be Included in the Condo Fees: Meaning you can advertise your rent as being more “inclusive” of extras. Always make sure to verify exactly what is covered in the condo fees however, as this can vary from building to building - most include gas and water, but not electricity. 
  4. Desirable Locations: Apartment buildings are typically located close to amenities, shopping, groceries, transit and other things that tenants love, which in turn makes your property more marketable to prospective renters.
  1. Higher Condo Fees: Condo fees are inevitable and tend to be highest for this type of property. That said, they often include utilities like heat and water.
  2. Tougher Resale Market: It is no secret that the apartment sector is struggling in Calgary right now. Price reductions are occurring all over the city and with a huge over supply and even more high-rise building under construction (especially in the Downtown area) it doesn’t look like these conditions are going to change any time soon. 
  3. Risk of Special Assessments: Similar to townhomes, if a large repair is required, and there isn’t enough money in the reserve fund to cover, there is a chance that you will see a cash call for owners. Once again it is important to remember that these issues would arise with other types of properties too, and would likely be more costly anyway.
  4. Condo Bylaws: All renters must follow the bylaws or the owners can get fined, so you need to ensure that these rules are understood and that you trust your tenants.
Investor Tip: Regardless of the type of rental you choose, be prepared for the time and expense that comes with maintaining a home you don’t live in. When it comes time to sell your property, be forewarned that it isn’t always easy to sell a rental property: tenants are messier and less flexible with showings, and rental properties typically see more wear and tear than non-rentals. 
If you’re thinking about investing in Calgary, we would love to help you out. Give us a call anytime so that we can get you on your way to becoming someones favourite Landlord (or Landlady). We help our clients assess the right investment for them after discussing budget, holding period, cash flow requirements, appreciation expectations, and need for liquidity. 

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