This article is the third in a series of interviews with Minneapolis realtor Tim Kindem from Keller Williams Integrity Lakes. In our first 2 discussions on residential real estate investing, we focused on purchasing duplexes and single-family homes. This article highlights the potential for townhome rentals. All 3 interviews also carry a broader message and insights on real estate investing from an agent-investor perspective. If you are interested in tapping into multiple streams of income through real estate, this article is for you. Let’s invest a little time.
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Answer: Absolutely. For me, it’s near and dear to my heart. My first home was a townhouse. I still own and rent it, and it’s the best investment I’ve ever made. It started as a unique situation. Originally, the association had a total of only four units, all under one owner. Later, an investor purchased all four, renovated them, got separate parcel IDs, and sold them one by one to set of first-time homeowners. Three of those original first-time buyers still own and rent them. The other was foreclosed on and later purchased. That buyer still owns it. It has worked out well for all of us.
A: They are at the top—my favorite! Tenants seem to be great, and you can make the numbers work. I look for townhomes more often than any other type of housing. Single-family homes are the biggest challenge because it’s generally harder to maintain attractive cash flow. With single-family homes, I usually see owners breaking even or reaching $100/month with 20% down as their best-case scenario in this market. On the other hand, townhomes can cashflow $400 and that’s including the cost of property management.
A: The #1 thing to look out for in all real estate investments: can you rent them out? With townhomes that has an additional meaning. Some associations do not allow their townhomes to be rented. Be sure to read the bylaws, rules and regulations. As an owner, you want cash flow which means your properties need to be rented. If you have good tenants who care about the home they live in, you’ll have fewer problems. Someone who is moving into a townhome community needs to understand that there are some rules: quiet times, etc.
With good tenants who can live comfortably within the rules and regulations of an association, I’ve found that you rarely have complaints from the community. If the association has a complaint, you need to respond quickly and respectfully. If not, the board could change the rules, and it won’t be to your advantage. Good communication is important—with tenants, owners and the association. You’re all on the same team.
It is also necessary to take a good look at the association itself, not only the rules, but its financial health. Sadly, sometimes, they aren’t sustainable. It’s a red flag if there aren’t enough funds in their reserves to support the maintenance that will be needed in the future. If the money is not there, it could mean some hefty assessments to the owners. That’s a trap I’d rather avoid. If you want to pursue this as an opportunity, you would need a solid game plan.
The other situation to watch out for is a current or pending lawsuit. An example would be the association that is involved in a lawsuit with a builder or remodeler for windows with bad seals, serious problems with in-floor heating, etc. This would also be a red flag since the outcome is still unclear. It can hinder some type of loans while resolution is in dispute. The flip side is that if you’re willing to buy in anyway and have the cash, you may find an attractive price since other buyers might not get the financing they need.
A: Tenants and cash flow. Some people are afraid of association dues or rules; however, I believe that dues and rules are positive. You know up front what the maintenance costs are—at least to a point and especially for large ticket items. And, you generally pay less for services (on average) because of the numbers in the association, rather than hiring and paying for only one property, as in a single-family home. With a good property and responsible tenants, you can achieve cash flow without a lot of problems or drama.
When clients come to you for help finding a townhome they can put to work as an investment, what seems to be their attraction to a townhome vs. a duplex or single-family home?
Funny you ask. No one comes to me looking for a townhome to rent out! Most buyers want to buy for themselves. They might say they want one that they could possibly rent out later to produce income, but most buyers are looking for affordability. Some buyers question whether a townhome will increase in value, and the answer is: Yes, it will. A rising tide lifts all boats. On average, townhomes will be more affordable, but they follow the same curve.
The market can definitely have its ups and downs. If apartments or townhomes are overbuilt for the ensuing market demand, they might be harder to rent or sell at a good price. Lately, new development has been rather light, so it’s not an issue here. New condos are now going up like crazy, and if the market research is spot on, that will be okay too.
As a residential realtor, I also watch for generational changes. There may be a dip in single-family housing demand as baby boomers move on to other options. Regardless of generation, townhome living is attractive. It’s nice to come home and not have to do the maintenance work, shoveling, lawn care, etc.
A: Especially for first-time buyers, I recommend that they study up on the tenant screening process and how to do it ethically, effectively and legally. You want to have quality tenants and you don’t want legal trouble. There are rules, and there are services that will do the work and background checks for you. You don’t want to innocently do things that are wrong. Read books and take classes.
The other thing is as basic as knowing how you want to collect the rent. Do you want a check mailed or dropped off to you, or do you want to use an online service? Cozy.co is really slick. Tenants can pay online, and it’s automatically transferred into your account, on time. They also do tenant screening, and it’s free for the landlord. The applicant provides the information and pays Cozy.
Property management can relieve the pressure and stress. You are paying for time and peace of mind. However, if you have the time, want to save the money and enjoy the process, you can save $70/month or more.
Q: Are there advantages to living in the townhome first and renting it out later?
A: Absolutely! Again, it’s the greatest thing. You can just enjoy your life. There’s a low cost of entry in many cases compared to single-family homes, and the less you spend on your first home, the more you can save for another home. Choose a nice neighborhood with an affordable price point, and it should serve you well.
A: Well, it could happen if you have a tenant who’s not playing by the rules (trash, pets, noise, etc.). You’ll hear about it from the association. In a way, it’s good to hear sooner rather than later, because then you can do something about it. Be quick to repair relationships, and it will make a dramatic difference whether the association turns out to be friendly or unfriendly in return.
Here’s a crazy situation that happened to an unsuspecting owner: the idea was that tenants are not to have unauthorized guests in the townhome/condo. The tenant invited another person to stay (unbeknownst to the owner), the two had a dispute and the tenant left. It ended up with a court decision that said the new person could stay. The problem was that the owner was not getting rent and didn’t even know the person living in the townhome. Watch your tenant situation closely!
A: That’s an easy answer: my own first townhome, because it’s been a money-maker for years. Early on, I read the ABCs of Real Estate Investing and applied that information to my own situation, and it’s been profitable ever since. If you have equity in a townhome, you can refinance, take cash out and buy another property. You can live in a home and later buy another with a cashout refinance for down payment money—and do it again.
A: Any investor who wants cash flow and is willing to have another entity who will add other rules to the mix is a good candidate. If that’s uncomfortable for you, you’ll feel like they are all over you. I look at the association as an ally and a positive partnership. If that’s your view, you’ll be perfect for this type of ownership and investing.
A: Persistence. Analysis. This market can be challenging, and it can take a long time to find what you want. Be open to different investment types (but not analysis paralysis). If you’re willing to look at different communities and property types, you’ll have more opportunities open up to you. Read and talk with other investors. Information and education go a long way.
A: Here are a few more for the enthusiastic readers out there:
A: Networking with people of similar interests is always supportive and encouraging. There are real estate investment groups in the Twin Cities and most major cities, and the Minnesota Real Estate Investors Association has several types of memberships available and will welcome you to visit a meeting at no cost.
For townhome owner-investors, it starts with being a good member of the community. If you are, it will work well for everyone, and your investment will carry profitability potential.