There are always conflicting views in the real estate investment world. When it comes to making a decision between buying one more expensive property versus two or more cheaper properties, opinions vary.
What do we think? It depends. Even if one type of investment is better than the other, it doesn’t make the other a bad investment. Making a decision regarding buying a rental property depends on numerous factors. You need to research those and balance them out for an ideal investment.
Factors You Need to Consider
As you may already know, there are several factors you need to consider when buying a rental property. We’ve put together some of the most important ones to help you make your decision regarding buying a rental property.
First and foremost, it’s a matter of budget. Deciding what type of rental property you can buy depends on how much money you can put into this investment. Figuring out your finances can help you easily narrow down your options and decide where best to invest.
You also need to take into account the areas you’re looking into. If you are considering investing in two cheaper properties, are you looking into the same city in both options, or will you consider different cities and/or states for your investment? Which neighborhoods or cities or states do you have in mind? Is the area you’re looking into well established in terms of the economy, migration, real estate market indicators, etc.? If you haven’t decided yet, use Mashvisor’s predictive analysis to get insights on occupancy rates, CoC return, cap rate, property comps and much more to make a more calculated decision about your investment.
Moreover, you need to pay attention to numbers. Factors like cash flow, purchasing costs, costs to make the property ready, maintenance/repair costs, rental income, taxes, all factor in in your decision making process when it comes to buying a rental property. You need to evaluate your options based on calculations for these among others. For example, you need to calculate the rental yield for each of your options and weigh them out against each other. Rental yield can help you assess return potential for different properties and compare options.
One last, but very important, thing you need to consider is how much time you have on your hands. Managing multiple properties will take up much more of your time. Do you have the time to manage two properties? If not, decision made. In contrast, if you have more time and less funds, you may think about investing in two rental properties instead of one.
Related: 7 Steps to Buying a Rental Property
Reasons to Invest in One Expensive Rental Property
The first reason you may want to invest in an expensive rental property is the appreciation opportunity associated with this type of investment. Generally speaking, more expensive properties appreciate better. And sometimes, you would be able to make more in appreciation of an expensive property than you would for total profits of two cheaper properties. However, this is not always the case for expensive properties, so make sure to include appreciation predictions among things you need to research before buying a rental property.
Another reason to consider investing in one expensive property is the fact that investing in one property is usually easier and less hectic. If you can avoid the common hassles of being a landlord, such as tending to tenants’ needs, collecting rent, running midnight repairs, then why bother with two properties? Unless you hire a property manager, managing one rental property is definitely easier than managing two. In addition to that, you’ll also be saving on plenty of expenses such as mortgages, repairs and rental renovations, different types of fees and expenses that are part of every rental property.
Furthermore, equity on expensive properties tends to be more. So if you’re more focused on building equity rather than on rental return and cash flow, you may want to invest in a more expensive rental property.
This one’s very important, so pay attention! If you’re a first time investor, we suggest you invest in one single rental property. Buying a rental property can be overwhelming for a first time investor. So if you are one, take it slow and give yourself the time to learn the ropes of real estate investing.
Reasons to Invest in Two Cheap Rental Properties
There are always arguments and counter arguments when it comes to buying a rental property. One of the most pertaining when it comes to this topic is diversification. Buying multiple properties will allow you to diversify your investment portfolio. Investors do not always agree on diversification. Most investors say diversifying your investment portfolio is beneficial as it will allow you to generate more profit. Other investors believe that going for a concentrated investment is better.
Investing in two cheaper rentals allows you to spread the risks that come with buying a rental property. One example of this is avoiding high vacancy rates. When you have two (or more) rental properties, even if one property is vacant, you’re still receiving rental income from another. Whereas if you only have one property, vacancy could be more of a serious issue. Cash flow is therefore more secure when investing in multiple properties.
Speaking of, cheaper rental properties usually have better cash flow. So if your investment plan is focused on achieving higher cash flows, investing in cheaper rental properties could be the better option.
Most investors who opt for two cheap properties do so because they lack sufficient funds to invest in one expensive property. If that is the case for you when buying a rental property, you may consider two cheaper ones. You could build equity against your investment and possibly invest in a more expensive one later on if that is what you’re aiming for.
Last but not least, if you see that the area or neighborhood you’re investing in may see future improvements whether it’s due to zoning changes, or a company moving there, then there may be potential for property appreciation and growth in general. Also, if there are people moving there for whichever reason, there are prospect tenants. And where there are tenants there’s potential income.
To Sum Up
When making decisions regarding buying a rental property, it is always helpful to use Mashvisor. We offer multiple helpful features such as our investment property calculator which will help you select the best property for you investment – whether it’s one or two or several properties.