Is a condo or townhouse a better investment? These readers want to buy property in San Francisco they plan to rent out when they move in a few years.
Q: I just read the AMA Ilyce did on Reddit about a year ago on buying a home. Thank you for all the information that you have provided to all the Reddit users on the financial mistakes home buyers make.
I’m thinking of buying my first house but I am in a bit of situation and I thought I could reach out and see if you can give me some guidance.
My wife and I both work in the San Francisco area and looking to buy a condo/townhouse nearby. We know we will leave the area in two to three years and might relocate to a different country or city. So whatever we buy, we’ll want to rent out when we move.
We don’t know if buying makes sense given the short timeframe we have and if we do decide to buy, we don’t know whether we should buy a townhouse or a condo. Single-family homes in San Francisco are way too expensive to consider.
Here’s how we’ve been thinking about it: townhomes are more expensive but have more room. We’d have to buy one in a less desirable neighborhood. So, I was thinking a condo will be better since renters might not be willing to pay extra for the townhouse. If we were buying for long term I would go for a townhouse since it is more spacious and, I think, a better investment.
This decision is so hard and stressful for us we could really use your advice.
Should You Buy Rental Property in San Francisco?
A: In San Francisco, where you live, home prices have been on an upward trajectory for some time. Every time a Silicon Valley-based company goes public, like Uber or Dropbox, thousands of people become overnight millionaires. And one of the first things they want to do is buy a home. Which sends prices escalating further.
If you own a home, you’re happy. If you don’t, you’re unhappy because rents are skyrocketing, too, and you’re worried you’ll never be able to find an affordable place to live.
If you lived somewhere else, we’d wonder whether buying a home now (condo or townhome) is the right move at all. Buying a home that you only plan to live in for 2 to 3 years, that you then intend to rent out, can be a great real estate investment strategy. But you need to know what kind of rental income you’ll generate and if it’s enough to pay the expenses associated with the property (yes, even in San Francisco, that’s important), and then some (because you should make a little money on your investment). You also need to know if you’re cut out to be a landlord, and a long-distance landlord at that. Who will make sure the property stays rented, is maintained and that the bills get paid?
Should You Buy a Home You Only Plan to Live in for 2-3 Years?
So let’s start with buying a home you’re only going to live in for two to three years. That’s not long. And while prices in the Bay Area have increased dramatically, that isn’t guaranteed. What happens if you want to sell in three years and prices have declined substantially?
Many experts are predicting a recession next year. When recessions hit, they can affect home prices, even in hot markets. And, when home prices go down substantially, they can stay down for a while. As hard as it is to daytrade the stock market, it’s equally difficult to know when you’re looking at the top or bottom of a real estate market.
Let’s say you buy and agree that instead of selling in a few years if prices have declined, you’ll rent the property. Here’s what’s on your plate: collect monthly rents, fix things that need repairs, deal with problem tenants, neighbor issues, real estate tax and mortgage payments and a whole host of other issues.
Say you have all that figured out, then you want to make sure you find the right property to put your investment cash. A townhome that costs you $6,000 per month should rent for more than that each month. Hopefully, the price of the property will rise over time and you may get a deduction for any losses. Talk with your tax preparer to make sure that works for your personal finances.
Is a Condo or Townhouse a Better Investment?
We can’t help you choose whether a townhome or condo is the better investment. It really depends on what you can afford, what the local housing stock looks like, and how much people are prepared to pay.
Sometimes single-family homes appreciate more quickly, but condos often have less repair issues associated with them and the condominium association in larger buildings takes care of repairs to the exterior and common areas of the building. And, you’ll pay for that, in the form of a monthly association fee, which will reduce the total amount you can borrow.
When you own a townhome or row home, that home may not be part of an association (so you save on the monthly fee) that takes care of the exterior of the building, but that means if the building needs repairs, painting, garage door maintenance, window replacements or roof repairs, you’re the one who will have to make the repairs and foot the bill.
Your next step is to do some serious homework. Start looking at neighborhoods, the types of properties there, what you’d be happy living in (because that should inform any purchase – what if you don’t move?) and how much you can afford to pay. Then, think about how much someone would pay to rent that property, how easy it would be to care for it, and whether owning this rental property means you won’t get approved for a mortgage in your new town (in case you decide to buy a home there).