What to look for when buying a townhouse: tips for investors

In Australia’s capital cities, the great Aussie dream is shifting away from the ‘white-picket fence’ house with a big backyard, with the latest Census data showing that more Australians are choosing to live in higher density housing such as townhouses and apartments.

Driven by affordability, lifestyle and demographic changes, it’s expected that more and more Australians will choose buying a townhouse or apartment over a house in coming years.

For those looking for the lock-up and leave, low maintenance lifestyle that apartments offer, yet desire more space akin to a house, townhouses bridge the gap and are growing in popularity with single professionals, young families, and downsizers.

To assist investors who are considering the benefits of buying a townhouse vs a house or apartment, or simply want to know what are the key factors to look out for when purchasing a new townhouse, we’ve put together this townhouse buyers guide.

What defines a townhouse?

Townhouses or ‘townhomes’ are traditionally 2-3 level homes that share common walls with a neighbour. They can range in scale from infill developments of 3 townhouses, up to master-planned estates in excess of 100 townhouses.

A typical townhome configuration is 3 bedrooms, 2 bathrooms and a single garage, but their growing appeal has resulted in more designs becoming prevalent, and 2, 3 or 4 bedroom townhouses with 1-2 car spaces are now very common. Most townhouses also have their own outdoor space in the way of a garden or courtyard on title too.

Quite often townhouse estates will have common facilities exclusively for residents like BBQs, parks or swimming pools.

• Location

   

  When they’re in the right location, townhouses play an important part in residential housing. In a well-planned community, apartments are usually the closest to shops, transport and other amenities, houses are found further out in the quieter, private streets – and townhouses fill the gap between the two.

  In middle ring suburbs (10-20km from a city centre), townhouses are often the preferred housing type for developments, as free standing new houses can be prohibitively expensive, and apartments not suitable for the local area. Stronger demand exists for those located in very close proximity to shops, transport and schools.

  In outer ring suburbs, and ‘greenfield’ developments (20km and more from a city centre), townhouses have become increasingly common, providing a more affordable entry price compared to house and land packages. In master-planned house and land estates, they are usually adjacent to parks, schools and retail centres.

• Affordability
  

  Because of their smaller size, buying a townhouse is generally more affordable than an existing home, or a house and land package.

  That said, it’s important to compare like for like when looking at prices. We often see new investors try to compare the price of an existing house in a suburb to a brand new townhouse – two completely different properties.

  When looking at the price of a new townhouse in an established area, investors need to understand what the cost of new housing in that location is.

  Often, you’ll only be able to get a brand new house by buying an old home, knocking it down and rebuilding – comparing this to a newly built townhouse, it’s easy to see their relative affordability. When looking at townhouses within a master-planned estate, often pricing can appear very similar to the entry level pricing of a house and land package. Investors should be wary though, as sometimes the advertised price of house and land packages do not include everything, and more money will need to be spent updating the home to get it to a ‘turn-key’ standard, for example landscaping, driveway and fencing.

• Strong rental yields

   

  It varies market-to-market, but a well-built townhouse in a good location usually sees stronger rental yields than houses in the same area. For investors seeking cash flow for their property portfolio, townhouses can be an appealing option when compared to a free-standing house.

In recent years, townhouses have soared in popularity, attracting a wide range of buyers and tenants. Young families, professional couples and downsizers all seek out the easy-care living that townhouses can offer.

According to the ABS, the proportion of family households has been declining. In the mid-80s, families made up 77% of Australia’s households. In 2016, this figure dropped to roughly 70%. Over the same period, the number of single-person households increased from 19% to 24%.

With smaller family structures, there’s less need for a big backyard, and greater demand for affordable, low-maintenance homes.

Townhouses have the most appeal when they are bright, spacious and modern. Location is crucial –everyday conveniences should be in close proximity. If you are looking for strong capital growth and tenant appeal, look for a townhouse that is only a short walk from everything a potential tenant would need – good local retail, public transport options and local parks.

When it comes to design, a well-built townhouse makes the most of natural light. They may have neighbours on two sides with windows only at the front and rear – but this doesn’t mean they have to be dark and gloomy. A well-designed townhouse is sensitive to its aspect and neighbours, capturing natural light from different angles through floor-to-ceiling sliding doors or skylights.

Though they’re smaller than houses, townhomes should never feel cramped, or be lacking in storage. There should be space to freely move between living and dining areas, and ample storage. When buying a townhouse, check the floorplan for built in robes, sizeable pantries, and plenty of storage space suitable for bikes or sports equipment.

Whilst a standard, single-part contract is still the most common type for a new townhouse property, split contracts are becoming more popular with developers. This is where the purchase of the land is on one contract, and the construction of the property on another. The pros for the purchaser are that you need only pay stamp duty on the land. However, hold costs during the build period need to be considered. The finance process of split contracts can be tricky, so it is important to ensure you’ve got a good mortgage broker who is familiar with these types of contracts before proceeding.

One of the perks of some new townhouses are the great community facilities on offer like parks, playgrounds, BBQs, firepits or pools. These add appeal to townhouse developments and help to create a sense of community, with residents interacting in these common spaces. These features may have an impact on strata fees within a development, however carefully managed strata-costs can result in very reasonable strata fees – and these features can add significant appeal resulting in stronger rents, and stronger resale values too. Check what’s included with your townhouse, and the associated strata or maintenance fees to look after it – these costs should be factored into your purchase decision.

Depending on the development, the townhouse could be under a strata, community or freehold title. Strata title is just as you would find with apartments, where strata fees are contributed to maintain the buildings and townhouse estate. Under community title each owner has full ownership of their lot, but pay to maintain communal facilities like pools, outdoor entertaining areas, BBQ areas, and playgrounds. Under a freehold title (also known as torrens title), everyone owns their lot completely, and there are no shared amenities. Before buying a townhouse, your solicitor will be able to explain which title your potential purchase falls under, and the implications of each.

• Local retail, parks, schooling and public transport links in close proximity
• The floorplan suits a range of household compositions like downsizers, families or young professionals
• The design lets in a lot of natural light to living spaces as well as bedrooms
• There’s plenty of storage space throughout – think built-in-robes, linen closets, and storage space within the garage
• What common facilities are within the development, and will this add value and appeal to tenants or owner-occupiers?
• The type of title (strata, community or freehold) suits your property investment needs

At Ironfish, we take the ‘portfolio approach’ to investing which is designed to leverage the unique advantages of each residential property type: apartments, townhouses and detached houses across Australia’s capital city markets. We have an in-house property selection team which helps source recommended properties for our investors.

To find out more about how our Portfolio Approach can help you achieve your financial goals, book an appointment with our experts.