As the median sale price for houses in Melbourne tipped past $1.1 million in late 2021, the dream of owning a house faded for many aspiring homeowners and property investors.
For many Australians, the current property market poses a major challenge as rising prices have made it increasingly difficult to find affordable housing, especially for those on tighter household budgets. As interest rates continue to rise, the borrowing power required for traditional property ownership has become even more constrained. As a consequence, investors seeking to enter the market are turning to other property options, which are becoming more and more attractive.
Last quarter, the median sale price for units in Melbourne was $628,000, which is considerably lower than the median house price of $975,000. However, while a unit provides a cheaper entry point to the property market, it also has certain disadvantages for investors.
Units usually come with less land than houses, which means that capital growth for units tends to be lower in comparison. This is particularly the case for high-rise apartments, where the land value of the building is shared by dozens or even hundreds of unit owners.
This is where townhouses can present an attractive alternative, offering more space than apartments and at a lower price point than houses. But are they truly the best of both worlds?
As townhouses have become a popular choice for investors in Australia, we wanted to explore the pros and cons of this option to help you make informed property choices.
What defines a townhouse?
A townhouse is a type of housing where individual units are attached to each other in a row, often sharing walls. Townhouses are typically multi-storied with a small front yard or back yard, unlike units that are often single-level.
The main difference between a townhouse and a unit is that townhouses are standalone, separate homes that are usually connected to each other, while units are self-contained residential spaces within a larger building or complex.
What are the pros of townhouses as investment properties?
For many first home buyers and property investors on a budget, the most desirable areas to buy are often outside of their price range. Townhouses can be a way around this problem.
More affordable than standalone houses, townhouses can be an accessible way to get into a high-demand area with strong capital growth potential without breaking the bank.
Lower maintenance costs
Your townhouse, especially if it is a newer build, may have a body corporate attached. This means that the financial responsibility for repairs and maintenance doesn't necessarily fall solely on the owner, in contrast to standalone homes, where the responsibility for all aspects of the property rests solely in your hands.
Additionally, even without a body corporate, the smaller size of townhouses can translate to potentially lower maintenance costs when compared to houses.
Stronger capital gains than units
As townhouses typically have a greater land-to-value ratio than units, they have the potential to attract stronger growth over time. Other factors, such as greater room, privacy and outdoor areas, also play an important role in the long-term desirability of townhouses.
Stronger rental yield than houses
Your expected rental yield is another important metric to consider when buying an investment property.
Townhouses often have a higher rental yield compared to standalone houses because of their relative affordability and overall desirability from renters.
Furthermore, investing in a townhouse can help buyers acquire a property in a prime location, which can attract quality tenants such as young families and couples. The desirable features of townhouses, such as their multiple levels and bedrooms, can also drive up demand and result in increased rental income.
What are the cons of townhouses as investment properties?
Historically weaker capital gains than houses
Unfortunately for townhouses, standalone houses have continued to outperform every other type of property on the market. This is due to a number of factors, including market desirability, land sizes and housing supply. Keep in mind, however, that there are many exceptions to this rule as many different factors will affect the long-term capital growth of a property.
In certain areas, especially in newly built or developing suburbs, there could be an overabundance of townhouses available on the property market.
Historically, developers have been more likely to turn houses into townhouses rather than the other way around. This trend, combined with the fact that new townhouse developments often have similar designs and appearances, can lead to an oversupply of this type of property.
As the property market operates on the principles of supply and demand, an oversupply of townhouses can potentially result in decreased rental demand and lower capital growth when compared to standalone houses.
These days, many townhouses are part of a shared strata title, which means that the land and its maintenance are shared among the neighbouring townhouses. This arrangement typically involves following certain rules and paying annual fees to cover repairs and maintenance for communal areas of the property.
As an investor, it's important to understand the specific terms of the strata agreement, as they can vary and potentially impact the property's overall appeal and value.
Weaker rental yield than units
Depending on where you are on your property investment journey, keeping a healthy flow of cash through a strong rental yield may be your top priority. As townhouses are generally more expensive than apartments and smaller units, they are likely to attract a lower rate of rental yield than their counterparts.
So what’s our verdict?
Although factors such as purchase price and rental yield will impact the success of a property, it's the capital gains a property accrues that will provide the most significant financial rewards for investors.
As a general rule, it is best to prioritise long-term growth potential over short-term gains and advantages. Following this principle, townhouses aren’t always the best investment option as their value is historically outperformed by standalone houses.
With that being said, this is certainly not always the case, and there are many scenarios in which a townhouse may be better positioned to meet an investor's property goals.
The property type is not the only indicator of a property's potential, with location, rental yield, quality of tenants and maintenance costs all playing a role in its long-term performance. If the affordability of a townhouse how helps you better reach some of these criteria, then perhaps this property type might be right for you.
Ultimately, it’s important to assess all the factors relevant to your individual situation before reaching an investment decision.