Do you buy a large commercial property or 2-3 smaller ones?

Question

Hypothetically speaking...

Say someone has enough down payment/credit score etc. to purchase a commercial property between 2-3 million dollars. Which scenario would be better: buy a single large property or 2-3 smaller ones? I would side with the larger one simply due to these management cost (would be professionally managed), more cash flow under one roof etc. But what I'm not sure of is to put a lot of eggs in one basket. By diversifying into several properties you can average out loses and maybe even undergo greater appreciation. What are your thoughts?

The properties that would fit his bill would be medical offices, multi-family and possibly a large hotel (not sure if this would be good though).

Insight is appreciated.

Joel Owens · Answer

Michael,

A Hotel has much more unstable income through REVPAR versus a multifamily building.

The smaller properties will be valued under 5 units more with the comparable sales approach versus the multifamily properties using the income approach.

With increasing rents each year,decreasing costs,and cap rate compression you can get plenty of appreciation.You have to remember that appreciation is trying to keep up with inflation each year.

More options and finance structures in commercial loans versus residential.

Yes you can own multiple small little buildings in different states to diversify but that can be risky and a headache as well.Then you have to find different management companies and expect them all to do a good job without issues versus one with a bigger complex.

I like the bigger complex also because one loan,one set of closing costs,one location to have to make repairs,you control the look and feel for the whole area of your complex.

With small buildings the people next to you on the same street could get foreclosed on,be a slum lord etc. which will drive away good tenants no matter how great your property looks.

So a larger building in a great location is a good investment.It's easier to 1031 the one property down the road.

Do you buy a large commercial property or 2-3 smaller ones?

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