One of the most common questions that I am asked by would-be investors is whether they should purchase one higher priced property or two more affordable ones?
The answer is, well, it depends entirely on you! What I mean by that is that your budget as well as your risk profile and goals will ultimately determine whether you should buy one or two properties.
There are benefits to each of these options, including the potential for superior capital growth by purchasing a more blue-chip property or diversification by buying two in different markets or locations.
Benefits of one higher-value investment property
- Purchasing one higher quality asset in a superior location, such as a house with land content in inner-city areas, may result in higher capital growth over the medium- to long-term because of the strong demand from buyers to live in these areas.
- Many blue-chip areas also often have fewer investment properties, so there is robust demand from tenants – and it can also be less complex than owning two properties, such as lower maintenance costs, as well as fewer leases and tenants to manage.
- There may be advantageous negative gearing/tax benefits when purchasing a higher price property that has lower cash flow, which can be appealing to some high-income investors. However, negative gearing is never a reason to invest but tax minimisation can be attractive to some investors with high incomes.
- A higher-priced, better-located asset may have a higher purpose than just building wealth, too. That is, it can be rented to family members, or it may be a legacy property that is passed on to younger generations for future use. For example, a Sydney investor with a Sydney property may pass it on to family members for future use, which helps to create inter-generational wealth (Side comment- I believe that property transfer will become a big thing in Sydney with both ageing boomers and affordability issues for first home buyers becoming more prevalent each year)
Benefits of two more affordable properties
- The most significant benefit to purchasing two more affordable properties over one higher priced one is diversification across different markets. This means that investors can benefit from different market cycles, plus it can help reduce risk with the “property love” shared across diverse locations.
- By owning two or more properties, investors can also sell down the portfolio in chunks. For example, an investor can divest one property perhaps and continue to stay in the game by holding the other.
- Fundamentally, two cheaper properties can be better than one more expensive property when it comes cash flow and yields. Lower priced properties will likely attract a higher gross yield percentage, so be easier to hold
- During periods of rental vacancy, your rental income is diversified across two properties, minimizing the chance of periods with zero income
In the property investment sector, buyers are always looking for the “magic bullet” that will seemingly suit everyone – regardless of their incomes, goals, or risk profiles.
However, there is no one-size-fits all model, which is why it’s vital that investors work with qualified property investment advisers who will create a tailored and unique approach that is just for them.