These are my personal favorite homes for a small investor, and I’ll tell you a few reasons why:
- Townhouses are a hybrid between the reliability of a condo and the appreciation/rental rates of a home. Sure, they do not rent as high as some single-family homes do, but they do rent much higher than a condo.
- They are also unique and not replicated by big corporate rental buildings.
- When you compare the purchase prices with rental numbers, you will see that townhouses easily pencil out with the highest delta between the two. In other words you make more per dollar on a townhouse.
- Lastly, no HOA keeps your exposure to risk lower than a condo. If you find a new construction townhouse in a gentrifying neighborhood, you will be astonished by the appreciation when you finally sell your investment. Because I know these are the best for purchase as a rental, I will spend the most time here.
Breaking Down What it Means To Invest in a Townhouse in Seattle
One of my favorite and most lucrative hoods is Central District. The last townhouse I sold for an investment in Central District was earlier this year. We purchased the property in Central District for $701,000. The home had a two car garage and 1890 square feet of space. The rent on this unit was $3750 per month given the location and size.
Now let’s break down the math. Let’s say you purchased with 30% down, your homeowners insurance is $675 per year, taxes at .8% (as is typical for Seattle)—your payment will come to $2840 per month. So the rental pays everything owed to banks, county, etc. and leaves you with an annual return of 5.2% on your downpayment.
Now we have the appreciation to talk about. Below, you will see median home price per square foot numbers and price per square foot in rents:
2013: Median price per sq.ft.: $293.89 | Rent PSF: $1.49
2014: Median price per sq.ft.: $284.06 | Rent PSF: $1.92
2015: Median price per sq.ft.: $379.59 | Rent PSF: $1.74
2016: Median price per sq.ft.: $393.07 | Rent PSF: $2.32
To calculate appreciation, you have several options. You can take all new construction sold in a given area and look for the median prices (like above). This number is good for a general understanding. Above, the numbers show a nearly 26% increase from 2013 to 2016. (Now, these are numbers based on different types of homes with various advantages or disadvantages not accounted for, so it’s probably a bit inaccurate, but it’s just to give you an idea.)
To be accurate, you must find the same home that sold twice—once in 2012 and once in 2016, for example. This can be tricky because the data is limited. So you need to try to find a few—hopefully more than three. This can be hard in one neighborhood.
I looked and found 3 examples… But I had to divide it between places built in 2012 and 2013 then sold again in 2016. We can extrapolate averages per year to see if they line up.
- 158B 22nd Ave, Seattle sold new in 2012 for $399,000 and again in 2016 for $612,500. That is an increase of 45%.
- 2516 S Dearborn St, Seattle sold new in 2013 for $372,000 and again in 2016 for $535,900. So in the space of a little less than three years the home grew in value by 31%. (if we added another year it would line up with the listing at 158B 22nd.
- 2510 S Dearborn St, Seattle sold new at the end 2013 $410,000 and again in the middle of 2016 for $550,000. So in 2.5 years this home saw an increase of 25.5% growth. Also inline with the per year numbers above.
Averaging the gains per year shows a little over 9% a year for townhouses sold in Central District. So had my clients purchased in 2014, they would have total gains of 14.2% per year when you add the avg. annual appreciation w/ the return on your investment. Now, that’s pretty GREAT! Plus, there are low risks involved with modern townhouses. They truly are built VERY reliably—the systems are modern, the energy efficiency is fantastic, and they have no yards.
A Note on Airbnb Rentals:
Now, last there is the holy grail of rentals. That is the AirBNB rental. Many find this to be too difficult to manage on their own, but that stems from a lack of knowledge. There are companies out there to manage your AirBnB rental for usually 10%. That would include bookings, cleanings, answering questions, etc. No doubt you will want to put in a bit of effort to make sure your guests are happy.
Still, I ran comps on an AirBnb rental in North Beacon Hill and found that in the peak spring/summer months that unit was pulling in about $9100 per month!!!! Sounds too good right? Well, during the winter months it only made about $2000 per month. Now that townhouse was probably only worth about $650k, so no matter how you stack it the numbers are FAR better than the traditional approach. Let me give you an example…
Real Life Example of a Townhouse Investment at 3015 S Byron St, Seattle 98144
What makes this townhouse special is how large it is and that it had a separate entrance for an AirBnB space with a private kitchen, living room, bedroom, and bath. Here is how the numbers might break down:
My clients are still pending on this so we will have to revisit this after a full year of renting. In this case, my clients will be living in the upper level (2 bed, 2.5 baths) and renting out the AirBnB. So averaged out through the year, the Airbnb space should earn $2196 per month.
My clients purchased the townhouse for $749,000 with 20% down. That means after taxes, insurance, principle and interest the payment is about $3400 per month. So, my clients will only spend about $1200 per month to live in a LARGE 2-bed, 2.5-bath home in the core of Seattle.
Now let’s pretend this was only for Airbnb and the upper levels would also be rented. According to Airbnb, the estimated average rent would be $4516 per month. I find Airbnb’s calculations tend to be lower than actuals, so it’s a good safe number to work from. So this is the other reason I like townhouses the best. You cannot short-term rent condos typically, with few exceptions. So townhouses offer more options and in each option they make more money than for less cost.
When you calculate whether or not you should invest in any home, you should remember that the market changes. You should run your numbers showing continued growth, balanced market with higher vacancy, and a market decline of 3% (a traditional slump). If the numbers are tolerable on all fronts, then it is a good decision. You should also take into account your time horizon for holding this property. If your timeline is over 10 years then you will do well regardless. It gets trickier the fewer years you intend to hold the home. Of course, right now Seattle can make you a profit after sales expenses in only one year, but this will not continue indefinitely. Making sure you run the numbers with a variety of market scenarios will help you plan for the best and worst cases.
Hopefully this helps you figure out at least some of the advantages and disadvantages of different homes as a investments! Of course these are my rules of thumb and the advice I follow myself. Townhouses are in general provide the least amount of risk with the highest returns.