How to invest $300K

Question

I have a client that has $300K they want to reinvest in real estate. They are wondering if they should purchase two rental properties with $150K down each so will cash flow, or purchase one higher priced rental and put the entire $300K down. Which makes most financial sense?

Michael E. Okoli, Jr. · Answer

Diversification is a business strategy for risk aversion. With multiple properties you limit the loss of rental income from a single tenant. If one location goes bad, flooded with poor drainage, fire outbreak, riots, weather related destruction etc, the other property is protected.

James Mc Ree · Answer

This is just a math problem. Model both and see which model performs better. The only other consideration might be if your client considers managing 2 significantly different than 1. Someone who is intimidated by it might not want 2, but probably doesn't want 1 either.

The risk in the two portfolios is inverse to each other since we don't know anything more about either alternative. The single property is a single point of failure. Two properties can help cover for each other if 1 has a problem, but there is twice the opportunity to have a problem. I consider these 2 risk profiles equivalent.

You should talk with your clients about their assumptions, including how easy it will be to rent the properties. It may make a difference if the rent for the $300k property is so high there will be few tenant prospects available and it may sit vacant. This would be a manifestation of the single point of failure risk. The same can apply to the $150k properties, but I am assuming they will be easier to rent due to the lower cost. That's not really a valid assumption without knowing more.