When considering real estate, many people think of condominiums, also known as condos, as apartment buildings in which the units are owned by individual owners, as opposed to one entity owning the entire multifamily property and renting out each unit. And many think of a townhouse or townhome as being any row of attached homes.
While these generalizations apply to many condos and townhouses, they don't really tell the full story. There's more to the definitions of each property type. With that in mind, let's look at the real differences of a condo vs. townhouse and what real estate investors should know about each.
What are condos and townhomes?
A condominium is defined as a property complex made up of individual units that are separately owned. Condo unit owners typically have a shared ownership interest in common area properties such as a community swimming pool or common space surrounding the units. And as is the case with most properties, there are pros and cons of buying a condo.
Condominiums are usually governed by a condo association or condo board (similar to a homeowners association, or HOA) that assesses a regular association fee or HOA fees and is responsible for the operation and maintenance of the condo complex, such as exterior maintenance of the building itself, snow removal, lawn maintenance, and maintenance of any shared amenities.
A townhouse is typically defined as a single-family dwelling with at least two stories of living space that shares at least one wall with another property. However, there is admittedly some gray area regarding the definition of a townhouse. Unsurprisingly, there is also a unique list of pros and cons of owning a townhome.
What are their similarities and differences?
First off, it's important to point out that there are some big similarities between condos and townhouses, especially surrounding how they differ from apartments. Both condos and townhouses are property types owned by individuals -- unlike apartments, wherein all units in a building are collectively owned by a landlord.
On the other hand, the biggest difference between condos and townhomes is their ownership structure. Specifically, townhouse owners own the structure and the land it sits on, while condo residents do not own any land. In fact, condo owners don't own the exterior walls, floor, or ceiling of their properties -- these are all part of the common property collectively owned by the entire complex.
It's worth noting that while the terms "condo" and "townhome" are often used in reference to a particular style of building, as mentioned, the main difference is in their ownership structure -- not how they look. In fact, many properties look like the generally accepted definition of a townhouse but are legally considered condos.
Why it matters to investors
One big implication for condo investors is the regular fees that must be paid to a condo association. To be sure, many townhouses are in communities governed by HOAs, but condo fees tend to be higher, all other factors being equal. A big reason is that condo owners own neither the land surrounding their units nor any of their units' exterior walls.
Because of this ownership structure, instead of obtaining an individual policy for building insurance (like a townhome owner would), a condo generally obtains an insurance policy for the entire building, and unit owners pay for it through their association dues.
There are also some financing implications investors should be aware of. In a nutshell, it can be more difficult to obtain financing on a condo than on a townhouse. Lenders tend to examine the financial health of a condo association very closely, and many won't lend on condos at all unless a majority of the units are owner-occupied.
This is the main reason there are far more all-cash transactions when it comes to condos than townhomes or single-family houses. If you aren't a cash buyer, before placing an offer to buy a condo, it's worth checking with your lender to make sure it won't be difficult to obtain financing.
Finally, it can be much easier to modify townhomes than condos because you'll own the exterior walls and the land the home is built on. For example, if you want to upgrade your exterior door to increase the property's curb appeal, it can be much easier to do in a townhouse than in a condo.
The Millionacres bottom line
To sum it up, the differences between condos and townhouses go far beyond architectural differences. Condos have a completely different ownership structure that investors need to understand before considering one as an investment property.