Not All Townhouses Make Good Investments: Here’s What to Avoid

In our previous articles, we explored why townhouses are becoming increasingly relevant for property investors, particularly as detached houses become less affordable.

But that doesn’t mean every townhouse makes a good investment.

Just like houses, there are good and bad investment townhouses. The dwelling type alone doesn’t determine investment quality. Property-level selection still matters.

So, what should investors look out for?

Below are four types of townhouses we would generally be cautious about. They’re not an exhaustive list of what can make a poor investment, but they highlight some important property-level considerations.

1. Brand-new and off-the-plan townhouses

Property consists broadly of two components: land and building.

Over the long term, well-located land tends to appreciate as it becomes scarcer, while buildings generally depreciate as they age.

With a brand-new townhouse, a greater proportion of the initial purchase price can be tied to the new building. Buyers may also pay a premium for a brand-new property, incorporating development, marketing and other costs. All these new property premium would lead to slower value appreciation, especially in the first few years following settlement. 

For example, 31/27 Turva Avenue Tarneit VIC 3029 is a 2-bedroom townhouse sold off-the-plan for $339.9k in 2013. The construction completed in 2016, and it was sold again in 2018 for $350k, gaining only 3% total growth in almost 5 years. Over the same period, Tarneit’s house market grew by 53% and the townhouse (unit) market grew by 28% growth, both much higher than the townhouse itself.

This doesn’t mean every new townhouse is a bad investment. But investors should carefully consider how much of the purchase price is supported by the underlying land, location and comparable established properties.

What do we prefer? 

Established townhouses where the value is well supported by the land and scarcity.

2. Townhouses with unnecessary facilities and high strata costs

Pools, gyms, lifts and elaborate common areas might make a development more attractive to residents, but they also cost money to maintain.

For investors, the question is whether those facilities generate enough additional rent or value to justify their ongoing cost.

One advantage townhouses can have over apartments is relatively simple common property. Buying into a development with extensive facilities and high strata fees can undermine that advantage.

An example is 13 Salacia Drive, a 3-bedroom townhouse on the Gold Coast. The complex  includes a 25m pool, gym, spa, recreation club, theatre, landscaped/common areas, security and a marina, resulting in a roughly $10,900 strata fee per year ($209 per week) as of 2024. 

It offers fantastic lifestyle, but does not make a great investment.

What do we prefer? 

Simple common property, manageable maintenance requirements and reasonable strata costs.

3. Townhouses with extremely small land components

One attraction of townhouses is that they can provide meaningful exposure to land at a lower price than a detached house.

But not every townhouse does.

Let’s take a look at the two properties below.

With 345sqm land, 1/1 Governor Close doesn’t just function as a house, it appreciated like a house as well (even better than a house, likely due to its affordability), while 66/27 Turva Avenue is more like a multiple-storey apartment sitting on a tiny piece of land. The enormous performance difference shows how important land component is.

The word “townhouse” just describes the dwelling type, but not the quality of the investment.

What do we prefer? 

Townhouses with a meaningful land component relative to their overall value, particularly where surrounding land is constrained.

4. Townhouses surrounded by abundant competing supply

Just like houses, scarcity also matters for townhouses.

In a large complex containing dozens or hundreds of similar townhouses, buyers and tenants can have plenty of substitutes. When multiple owners sell or lease at the same time, this competition can reduce pricing power.

But investors shouldn’t only look inside the complex.

A townhouse in a small development can face the same problem if hundreds of similar properties are being constructed nearby. 

The issue is substitutability: how easily can a buyer or tenant find another property offering essentially the same thing?

What do we prefer? 

Established locations where comparable townhouse supply is limited and future development is constrained.

So, what makes a good investment townhouse?

Reverse those four characteristics, and we start to see what we generally prefer:

• established rather than carrying a substantial new-build premium;

• simple common property and manageable strata costs;

• a meaningful land component; and

• limited competing supply.

Put simply, we want a townhouse to capture as many of a house's economic characteristics as possible, while offering a lower entry price.

But these four factors are just examples, not a complete property-selection checklist. Avoiding these four red flags doesn’t automatically make a townhouse a good investment, just as being a detached house doesn’t automatically make a house a good investment.

Property-level due diligence matters just as much for townhouses as it does for houses. Location, property condition, layout, strata health, comparable sales, rental demand, future supply and resale appeal all need to be assessed, because the goal isn’t simply to buy a townhouse / affordable property. It is still to buy the right property in the right market.

If you’re considering a townhouse but aren’t sure which properties or markets are investment-worthy, our team can help. Book a FREE discovery call with InvestorKit to discuss your next investment.