Are townhouses a good investment property opportunity?

Typical modern townhouses investment property owners could consider

First published 21 January 2025

Townhouses are a compelling investment choice for Australian property investors. They offer an affordable, low-maintenance alternative to traditional housing, making them a popular choice for investors. Their appeal lies not only in their affordability and accessibility but also in their alignment with contemporary trends in sustainability and urbanisation.

This article explores the pros and cons of investing in townhouses in Australia, as well as their depreciation potential, providing valuable insights to help guide your decision to the question, are townhouses a good investment?

Key take-out

  • Investing in townhouses offers a mix of benefits and challenges
  • Townhouses can offer lucrative tax depreciation deductions
  • Both new and second-hand townhouses hold depreciation deductions

Are townhouses a good investment?

As with any investment, there are pros and cons to having a townhouse as an investment property.

The pros:

Sustainability

Newer townhouses are increasingly favoured by environmentally conscious investors and renters alike, due to their incorporation of sustainable design and energy-efficient features.

Affordability

Townhouses often present a more affordable option than standalone houses, making them accessible to a broader range of investors. The lower entry cost can also mean reduced financial risk and the potential for higher returns on investment.

High demand

The demand for townhouses in Australia is consistently strong, driven by various factors including urbanisation, population growth, and lifestyle preferences. Townhouses appeal to a wide demographic, including young professionals, small families, and downsizers, due to their balance of space, amenities, and location. This high demand can translate to lower vacancy rates and more stable rental income for investors.

Location advantages

Townhouses are often situated in prime locations, offering the convenience of city living with access to essential amenities such as schools, shopping centres, public transport, and recreational facilities. Investing in a well-located townhouse can result in significant capital growth over time, as properties in desirable areas tend to appreciate faster.

Low maintenance

Compared to standalone houses, townhouses typically require less maintenance. They often have body corporates that handle exterior maintenance, landscaping, and shared amenities. This can save investors time and money on upkeep, making townhouses a more hands-off investment.

Strong rental yield

Townhouses often provide strong rental yields, making them an attractive option for investors seeking regular income. The combination of high demand and competitive rental prices can result in a steady cash flow, enhancing the overall return on investment. Additionally, townhouses' modern designs and amenities can command premium rental rates in competitive markets.

The cons:

Body corporate fees

One of the drawbacks of owning a townhouse is the associated body corporate fees. These fees cover the maintenance of common areas and shared facilities, but they can be substantial and impact the overall profitability of the investment. Investors must factor in these ongoing costs when assessing the potential returns from a townhouse.

Limited land ownership

When you invest in a townhouse, you typically own the building and the land immediately beneath it, but not the surrounding land. This limited land ownership can restrict future development opportunities and potentially impact the property's long-term capital growth compared to standalone houses that come with larger land parcels.

Potential for strata disputes

Living in a strata-titled property like a townhouse means being part of a community, which can sometimes lead to disputes. Issues such as noise, shared expenses, and maintenance responsibilities can cause friction among residents. While body corporates can manage these disputes, they can still be a source of stress and inconvenience for investors.

Resale value uncertainty

The resale value of townhouses can be more unpredictable compared to standalone houses. Market conditions, the performance of the body corporate, and changes in the local area can all influence the property's value. Investors must carefully consider these factors and conduct thorough market research before purchasing a townhouse.

Summary

Investing in townhouses offers the benefits of sustainability, affordability, high demand, prime location, low maintenance, and strong rental yields, but may come with challenges like body corporate fees, potential strata disputes and resale value uncertainty.

Tax depreciation on townhouses

Tax depreciation is an important aspect of townhouse investment that should not be overlooked. In Australia, investors can claim depreciation on both the building structure and the fixtures and fittings of a townhouse. This can result in lucrative tax deductions, making the investment more financially attractive.

A capital works deduction, also known as Division 43, can be claimed for the wear and tear that occurs to a building’s structure and items that are permanently fixed to the property. For properties built after 1987, investors can claim the capital works deduction at a rate of 2.5 per cent per annum for up to forty years, which can be a significant amount over the property's life.

In addition to building depreciation, investors can claim depreciation on the plant and equipment, also known as Division 40, within the townhouse. This includes items like appliances, carpets, and hot water systems. These items generally have a shorter effective life and can be depreciated more quickly.

Case study

Ralph buys a new three-bedroom townhouse for $780,000

His property is rented for $550 a week or $28,600 per annum

BMT uncovers $18,400 in depreciation deductions in the first full financial year

New townhouse purchased for $780,000 depreciation breakdown

New townhouse purchased for $780,000 Without depreciation With depreciation
Annual rental income $28,600 $28,600
Annual property expenses $32,000 $32,000
Pre-tax cash flow (income less expenses) -$3,400 -$3,400
Depreciation claim $0 $18,400
Total taxation loss (pre-tax cash flow + depreciation) $3,400 $21,800
Tax refund (tax loss x tax rate of 37%) $1,258 $8,066
Annual costs (pre-tax cash flow + tax refund) $2,142 $4,666
Weekly cost -$41 per week +$90 per week
Difference of $131 per week
Disclaimer: The case study estimates shown are based on the diminishing value method of depreciation and are provided as an approximate guide, for example purposes only. BMT Tax Depreciation is not liable for any misinterpretation from these case studies.

Did you know?

It’s not just new townhouses that offer great depreciation deductions. Second-hand townhouses can too – especially if they’ve been renovated.

By incorporating depreciation into their tax planning strategy, townhouse investors can enhance their cash flow and overall return on investment. Depreciation deductions reduce taxable income, resulting in lower tax payments and more money in the investor's pocket.

The bottom line

With careful planning and a strategic approach, investing in townhouses can be a lucrative addition to a property portfolio. Whether you're a seasoned investor or just starting, townhouses offer a unique opportunity to capitalise on Australia's thriving property market.

Upon purchase of your investment property, it is advisable to engage BMT Tax Depreciation to prepare your depreciation schedule. We are qualified quantity surveyors ensuring that all eligible deductions are claimed accurately, allowing you to maximise your depreciation deductions. Call us today on 1300 728 726 or Request a Quote.

Disclaimer: The case study estimates shown are based on the diminishing value method of depreciation and are provided as an approximate guide, for example purposes only. BMT Tax Depreciation is not liable for any misinterpretation from these case studies.

Connect with us

Media enquiries

Subscribe to media releases
or enquire below

1300 728 726

[email protected]