Should I invest in multiple cheaper properties or a single more expensive one?
I know you’re nodding your head right now, so I won’t bore you any further.
Here’s my 2 cents from my experience with dozens of properties of all types and prices.
I should note that I am looking at the subject from the perspective of an investment finder in Austin Texas, but the format is also true when the prism is enlarged to other regions (or when comparing regions).
One precious asset
Pros: Well, it’s easy. Who doesn’t want a new, renovated, shiny property? Bright white walls and marble in the kitchen where you can see the reflection of your happy face? Open space with a pampering yard in a comfortable neighborhood with people running outside to complete the idyll. Having an expensive property is fun.
It will be newer, so less maintenance expenses. It will probably be in a better neighborhood and maybe bigger with more bedrooms. It may have a higher level of finish, more attractive to potential tenants. And of course, if you only buy one property, then you have less to do with moving tenants in and out and everything that entails.
In addition, location is a critical element in real estate – and strategic location can often yield huge returns in the long term, so it may be worth paying a higher premium if we are willing to “bet” on a certain location.
Cons: In general, from a flow point of view, expensive houses generate less profit. The reason for this is that you are paying a high premium for the appearance of the property, for a new carpet and fresh paint on the wall, and this is money that will not necessarily be reflected in the rent.
In addition, as soon as you target the beautiful, large and expensive properties – you enter the homestead market, meaning people who are looking to buy themselves a house to live in, and they don’t care if the house is suitable as an investment because they intend to live in it themselves. So now you are competing with buyers who don’t mind going “all in” for the house because they fell in love with it, and to beat them you have to pay much more than the asking price of the house.
Several cheap properties
Pros: This is the place to point out that when we talk about cheaper properties in the Austin area and the surrounding area, we are referring to properties that cost 400-500k, and are located in one of Austin’s suburban cities (eg Leander, Round Rock, etc.). These are not inhabitable dumps, but beautiful houses, sometimes with a lower level of finish, but in good neighborhoods with a young population.
The main advantages of several cheap properties are a higher ROI (cash flow income), dispersion of the investment between several areas/neighborhoods, a higher potential for value increase (with and without a light aesthetic renovation) and less competition in buying the property.
Cons: It all depends on the condition of the house. If it is an old house, then maintenance costs may be higher, but this is not always the case. You will have to deal with more tenants, leases, etc. More mortgages and dealing with everything involved in owning a house (insurance, taxes, etc.).
Also, the location of the cheaper properties may be less profitable in terms of property value.
In conclusion (you can skip straight here)
There is no “right” and “wrong” when choosing a real estate investment strategy. What suits one investor will not necessarily suit another, there are many parameters that influence the choice of direction, for example: budget, free time, the purpose of the investment, financial future planning and more.
Personally, if a client is interested in creating a passive income for himself and even reaching financial independence or early retirement, I will recommend him to purchase several cheap properties. From my experience in the field, if in the same area there is a property that currently costs 400k and another property that costs 600k, the increase in their value will approximately behave more absolute than relative. In other words – after a year it is more likely that both will rise together with the region at a similar rate (let’s say to prices of 500k and 700k respectively) and not at a variable rate (let’s say at a rate of 25% which destroys prices of 500k and 750k respectively).
In other words: the gap between the assets will usually be maintained, and all the assets together will increase more than they did in the past.
In addition, we as The Investory have a big advantage and that is that our business contains both an architect and an interior designer as well as renovation contractors. We renovate houses for clients without them having to bother with it at all or invest time or energy in it, so I will always prefer to buy the uglier, cheaper house, the one with less competition, in a neighborhood that is currently growing just before the explosion – and turn it into a stunning gem which will increase its value by dozens of percent as soon as we finish the improvement. I have already seen, and done, dozens of such renovations. If you do it right – with a $20,000 investment, you can increase the value of the property by $40,000 without going into wild adventures.
I hope I answered the question and helped with the confusion. As I mentioned, something suits everyone differently. If you want to consult me to understand what suits you personally for your needs, budget and goals – feel free to contact me!