I often get asked whether it’s better to have one or two large investment properties or several smaller properties which total the same value when added together.
Advantages of larger properties
- Fewer number of tenants to deal with. Even if you have a property manager that can help you manage your rental properties, managing fewer tenants is easier if you only have one or two large investment properties.
- The higher valued properties may attract a better quality tenant. More expensive properties can attract a better quality tenant as long as you do proper research since fact-based research and careful targeting are keys to a successful rental property.
- There are less things that can go wrong and fewer repairs to deal with. Owning several smaller properties may mean more work and more money that you’ll have to put into repairing and managing them.
- Less dependent on interest rate changes. Interest rates do not affect the higher end properties as much as the cheaper properties financing and mortgage rates
Disadvantages of larger properties
- Depending on how you structure your entities, the land tax is generally larger proportionally the more expensive the properties are.
- The stamp duty payable per property is proportionally higher. Even though stamp duties will get cheaper in NSW, you may have to pay higher stamp duty proportionally to many smaller rental properties.
- If you lose a tenant in a larger property, you will lose a larger proportion of your rent versus losing a tenant in a smaller property as the other small properties will still have a tenant. You spread your risk. Here are some other risks to look out for as a property investor.
- Having many smaller properties who have tenants closer to the median rent level tend to have more tenants available. It’s a lot safer to have a few properties at the medium rent levels in case a tenant leaves. Produce sustainable rental yields.
- Capital growth of smaller properties is sensitive to interest rate hikes. Interest rates have an extensive effect on the value of cheaper income-producing properties.
- Rent returns as a percentage of the capital value tend to be less with larger properties. Your ability to service larger properties due to the lower rental yields may affect your cashflow profitable effect on your rental yield.
On balance, I would favour many smaller properties versus fewer larger properties as the risk is far less, albeit more work to deal with more tenants.
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