Better to get one expensive property or a few cheaper ones?

32 Replies

Hi all! I have a set amount to spend on investment property(ies) and am weighing the pros and cons of getting one that's larger and thus, more expensive vs. a few small ones in the same area. Any advice? I figure the larger would attract a family, while the smaller studio/1 BR types would be for couples/singles. As a newbie, I'd guess the smaller spaces would be easier to rent, but having one more expensive place might be easier in terms of management. Any thoughts? Thanks!

Originally posted by @Colette B. :

Hi all! I have a set amount to spend on investment property(ies) and am weighing the pros and cons of getting one that's larger and thus, more expensive vs. a few small ones in the same area. Any advice? I figure the larger would attract a family, while the smaller studio/1 BR types would be for couples/singles. As a newbie, I'd guess the smaller spaces would be easier to rent, but having one more expensive place might be easier in terms of management. Any thoughts? Thanks!

 I look at it like this. You can get 10 residential mortgages. So assuming you have 1 mortgage for the house you live in you should use the remaining 9 on the most expensive 1-4 unit houses you can afford. You are essentially at least going to quadruple your money over the course of the loans so you should put as much out there as possible. That's literally the best debt in the world.

After you exhaust those 10 mortgages it's then time to look at the big stuff. Commercial financing has no limits. If the property has a good DSCR & you have the down payment money they will loan you as much as you can handle. Note, the terms are no where near as favorable as those 1st 10 residential loans.

Thanks for the advice, great insight to consider!

@Colette B. which strategy will get you to your cash flow number quicker?  If your investing for appreciation, which deal will get you there?  Start with your goals and work backward.  I invest strictly for cash flow thus I purchase property according to that metric.  All the best to you.  

Thanks @Shawn Ackerman . That makes sense. I listened to the recent BP podcast and the interviewee suggested that for cash flow smaller places are more lucrative... Just starting my real estate investing journey, so lots to learn and consider! At this point, I'm thinking I'd like to invest in multiple properties - some for appreciation as a retirement nest egg and some for cash flow for now. 

With investing for cash flow, I understand it's key to get a great deal. How much below asking have you been able to get properties at? Any advice on knowing how low you can go? 

What is your goal and energy? 10 headaches simutaneously and put more reserve for maintenance? The cheapie 1 br, cottages do not appreciate as much as one grand mansion. Are you interested in the land or cash flow? Do you want a turn key self running rental or having to deal with 10 tenants with % tardy or eviction? 

@Colette B. here is my rule of thumb.  When you make the offer it should make you cringe a little.  Otherwise your starting your offer to high.  "how low" is really market specific as the demand/supply have a large part to play.  Are you considering investing in the competitive NYC market?

@Shawn Ackerman that's an awesome rule of thumb! Thanks for sharing. With the cringe-worthy offers, do you think they need to be all cash? Or do you just have to catch a seller at the right time? 

I'm going to start looking in NYC and close areas of New Jersey, like Jersey City, which is accessible by the PATH trains. I grew up in Brooklyn and lived in Jersey City for a couple of years, so know those areas best. Do you have investments in NYC? One of my next research tasks is to compare being a NYC landlord to a NJ one. I've heard that NYC is very tenant friendly in a way that can cause headaches and unpaid rent for owners.

@Colette B. If you are trying to get good deals on properties, I recommend creating a couple solid relationships with hard money lenders, or talking with your friends/family about raising a few hundred thousand dollars.

This will give you the ability to make “all cash” offers on properties. Most of the good deals will be scooped up with all cash offers.

Sometimes it’s better to close the deal with private/hard money and pay a few thousand dollars in fees and THEN refinance with a conventional loan. This allows you to capture good deals, even with paying the fees.

Best of luck to you!

@Justin Hammond thanks for that rec.! As a newbie I must admit (with slight embarrassment!) that I don't completely understand why sellers prefer all cash so strongly. If a buyer uses a bank mortgage won't the seller still get the cash? Is it just that an all cash buyer can expedite their sales process?

@Colette B. Sellers prefer cash because, in most cases, it's a quicker, faster closing. With mortgage financing many things can go awry including the financial institution yanking the debt-financing offer at any time or investor's personal capital condition materially changing. 

As for you other questions, you should first focus on understanding your goals, objectives and investment criteria. They are partly stemming from the amount of capital you are willing to invest and the education/experience you have. BP is a great resource for the latter. 

Investing for cash flow is considered safer especially as many people have been scared from their 2008 experiences. In gateway cities like NY, San Francisco or Boston, cash flow does not exist (or is a joke). In these markets, eventually you are "investing" for appreciation (with notable exceptions - $50/unit does not qualify as cash flow IMO). What path you take depends on your goals, objectives and criteria. 

@Omar Khan thanks for that info. That makes sense re: the desire for all cash.

Thanks for the insight on NYC cash flow not existing! I've been running numbers for places here in NY and wondering how I would get to positive cash flow and not just breaking even at best, but figured this meant I'd have to snag a place well below asking. When you started investing did you stick close to your home? This feels safer to me, as I know the area and could easily get to it, but if I do decide to invest for cash flow, maybe I would need to consider branching out... 

@Colette B. My family has owned commercial properties, so my first "investment" was not a house but as a part-owner of a retail center (got a lucky break that was not inline with my experience or capabilities). Nonetheless, it doesn't matter where you start, what matters is that you have started your journey. 

Investing for cash flow is considered conservative. Investing for appreciation is considered, especially on these forums, more akin to speculation. I think, the answer is somewhere in the middle with the caveat being that you have had to do your research and findings have to be backed by #s not emotions. Many investors here are investing in more cash-flow friendly markets in the Midwest and the South. 

Investors who, primarily, invest in markets like NYC, Boston, Seattle, San Francisco, LA, Miami can only dream of making the cash-on-cash returns of the Midwest. But they have been rewarded with a higher capital appreciation. No one way is correct. 

If this is your first deal, I would focus on investing in your local area. You don't have to get the deal of the century - just a reasonable deal at a reasonable price - to get the ball rolling. Alternatively, if you are a sophisticated investor or have a higher level of capital, you can look into partnerships, JVs or syndications. 

@Omar Khan thanks for the reply and insight. I am feeling pressure to get "the deal of the century" but think your advice to get the ball rolling with a reasonable deal will get me going faster. Thanks again!

@Colette B. No worries. Hope things work out for you. Just remember, "the deal of the century comes along every week." :)

Here's the other thing to keep in mind. Those 1 bdrm units are going to be a lot more difficult to manage and have higher turnover then say a 3 bedroom home. The question then becomes how much time do you have to manage were you to grow to say 10 units?

To me, I have only always bought homes with 3 or more bedrooms. They're much easier to rent in my areas and far less turnover. I'd rather do one 3 bedroom home making 250/mo then buy 3 1 bedroom units that make 600/mo total.  Because the reality is you're going to see higher turnover and that projected profit isn't going to be your actual profit anyway.

@Colette B. They prefer all cash because financing falling through is a very common reason for a deal to not happen.
It’s very frustrating when you are under contract for 30 days and then you have a lender pull the financing from the buyer for whatever reason.
Pre-qualification letters are very easy to get - an actual loan isn’t so easy.

It’s not uncommon for sellers to go through this process 2 or 3 times on the same property, waiting 90 days to finally close. You can see the frustration, and thus the benefit of having an all cash offer, with financing not being a contingency.

@Mike H. that's a really good point! Thanks for that input - great for me to think about as I set my goals.

@Justin Hammond thanks for that. I didn't realize how common it would be for financing to fall through. Great to know why/how all cash is such an advantage.

@Colette B. This is going to be an overly general answer but you really have to make sure that your market (guessing it's NYC) can support a lot of studios or 1 bedroom units.  Not every market can and if you have a bunch of them you risk getting the bottom-dwellers for tenants because, well, it's cheaper.  If you go to many areas of the county you end up (again, my opinion only) that it's easier to rent the 2/1, 2/2, 3/2 options because you could rent to affluent singles, couples, couples with kids, etc.  It broadens out your pool of renters vs. a studio.  Side note, I do have a bunch of *nice* 1 bedroom units that I rent but it's in a college town so there's a back-stop in terms of a rental populace with mommy and daddy's money to spend.  Not sure if any of this helps...

If this an option..... I say 1 roof with as many doors as possible...1 loan, 1 building to repair, 1 property manger, 1 location.

@Andrew Johnson thanks for that - it definitely does help! The more I can think this all through before I buy, the better off I'll be. Going along with your point, I've been debating getting one renovated studio/1 BR condo in a trendier/more central part of NYC vs. getting a much cheaper one (or two) a 20 min. commuter train ride away in New Jersey. I was thinking that the renter in the more expensive studio might be easier to deal with and count on, as they'd likely be a young professional or young person with a parent funding their apt. Any insight/opinions on that choice?

And, how have you found college town rentals? I've heard they can be rough, since students/young people will not treat your property as well as adults. Have you found that to be the case?

@Colette B. I have a property manager so those little "hassles" aren't really mine to deal with.  I really haven't seen much more in terms of repairs, etc. for the students vs. other tenants.  It does help that the units are 1 bedroom/1 bathroom and in good condition.  My personal theory is that if you prioritize "beer money" you can find a similarly sized unit in the same area for $50/month cheaper and buy some PBR.  Additionally, if you're going to host a kegger, it's not going to be in a 1 bedroom/1 bathroom unit.  In the same city where I invest there are a lot of student rental homes near the campus.  Those homes usually are older and really aren't in the best condition.  So while I'm happy to own the "nice" units (and pay more for them) I wouldn't be as happy to own the lesser units.  I also have her keep them up pretty meticulously so there's no confusion about the way that the property is being delivered to a new tenant.  That said, I'm sure I'll run into some idiot who trashes a unit.  It will happen.  I just haven't seen it happen yet.  But I have looked at SFRs where it has happened...not a pretty site...homemade "bars" constructed in the living room...and other frat-ish things.

And I own apartments so it's a bunch o' units in one structure.  One place for the PM to go.  One place to "police" if you will.  I don't know that I'd want to buy 4 condos in 4 separate buildings to rent out (even if they were nice, in the same market, etc.) as it's just 4 sets of potential hassles.  You get some nice things like "all 4 won't be vacant at once" but if you buying condos it's also 4 HOAs to deal with...ugh.  Just doesn't sound like fun for me.  Others will disagree (and they are right too!).

@Colette B. If you grow and scale into large mfh think of the exit st ategy going in. You need to sell to a owner occupant retail. So I would avoid duplex tri or quad plex.

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