Should I buy two properties or one?

Lots of investors only have enough capital to buy one property when they first get started. For them, this question isn’t an issue. Then there are others with larger amounts of cash who have the potential to buy more. In this scenario, we often get asked: should I buy two properties or one?

The answer often depends on the individual and their goals and circumstances. Budget will also have a big impact.

If you have £50k to invest, you will realistically be limited to just one. Probably around the £150k price point after accounting for all costs and fees.

If you have £100k to invest then you could buy two of those £150k properties. Or you have the option to just buy one larger property, around the £300k price point.

So, which option is best? Should you buy two properties or one?

Here are the main factors to consider as a guide.

What is your goal?

Are you prioritising capital growth or rental income?

One better quality property will generally be better for capital growth. A larger deposit means you can afford more desirable higher-value locations. They are usually higher value because more people aspire to live there so they have a history of stronger growth. You may also afford larger family houses which typically have higher growth than cheaper flats.

Two cheaper properties will generally produce a higher income. Yields on lower value properties are typically higher. That means potential for higher cashflow.

Your goal is an important consideration for these reasons. Many investors are looking for a balance of both, in which case there are other considerations too.

How much time do you have?

More properties to manage will require more of your time. That should be obvious!

Even if you use an agent to manage them, you can still expect them to contact you with issues. More properties mean more potential issues requiring your attention.

There is always plenty of admin that needs to be done on a per property basis. Mortgage applications can be very time consuming. Insurance renewals. Compliance checks. Licence applications when applicable. Even the paperwork required throughout conveyancing to purchase initially. It all adds up when you have more properties.

Also consider that cheaper properties tend to be older properties. Chances are, they will require more maintenance. That means issues are likely to crop up more frequently.

Cheaper properties will also be in comparatively less desirable areas. That means the tenant demographic could be more challenging too. You are more likely to spend time chasing rent arrears than with one better quality property.

So, should I buy two properties or one?

Multiple properties can make sense when you have more time. If you have a flexible work schedule or are self-employed, you might have time to manage more properties. Or maybe if you’re semi-retired, have time on your hands, and are prioritising income.

One property makes sense when you are busy. If you work full time and have family or childcare commitments. If you run a successful business or have a high wage, your time is valuable. It makes more sense to reduce your property workload.

Always consider how much time you will have in future. Maybe you have time now, but your goal is to have passive income and move abroad. Then it makes more sense to set things up to have minimal time cost.

How will you grow your portfolio?

Most people won’t achieve their goals with just one or two properties. You’ll need to grow a larger portfolio if you’re looking to generate a meaningful income. So, you must consider how you plan to scale. How will you fund future deposits for your next purchase?

Maybe you can save large chunks of cash from your job or business. Then you might not need to rely on your portfolio funding new purchases. If not, you need your investments to generate capital to fund future deposits.

Some people think they will save up the rental income to fund their next deposit. This is far less efficient than releasing equity to reinvest. It rarely ever works in practice.

Assume you invested £50k in a cheaper property. Even if you achieved a 10% rental ROI, that’s only £5000 per year. After tax, only £4000 per year (approx.). At that rate, it would take 13 years to save up your next £50k deposit! With two of these properties, it would still take 6 years. There is also a high likelihood that some of this would need to be spent on maintenance. The reality is that saving up rent takes far longer and doesn’t benefit from compounding.

Alternatively, one £300k property growing by 5% annually would be worth £380k after five years. That’s equity growth of £80k. You can potentially release 75% of this when refinancing. That leaves you £60k equity (tax free) to reinvest. Plus, rental income! Of course, the market won’t grow 5% every year, but this is a historical average.

So, should I buy two properties or one?

If you need your portfolio to fund future purchases, focusing on capital growth will be essential. In that case, buying one better quality property is likely to be best.

If you plan to grow your portfolio from other income, you will have the option to focus on cashflow. In that case, buying two cheaper properties could be an option.

Risk mitigation

In property, just like any other investment, there are always risks you must consider.

If you are worried about diversification, two properties will be better than one.

When you only have one property, a void period wipes out 100% of your income. A void period in one property when you own two is only 50%.

If you invest in different locations, they may perform better at different times. That means if one area is not growing, another one might be. It spreads your risk.

When you just own one property, it’s vital to have a larger emergency fund.

If you are worried about tenant challenges, one property will usually be better than two.

Higher value properties are generally in more desirable high demand neighbourhoods and attract a better-quality tenant profile. That means less risk of rent default, arrears, and lower hassle in general.

Cheaper properties in less desirable neighbourhoods may struggle for quality tenant demand. That can mean longer void periods. You may also be forced to accept a riskier tenant demographic.

If you are worried about unexpected maintenance costs, one property will be better than two.

Firstly, cheaper properties tend to be older properties. Not always, but often. Older properties will naturally require more frequent maintenance, so costs are typically higher.

Secondly, even if the properties are a similar age, two properties mean twice as much maintenance. Two boilers that could break down. Two bathrooms that could leak. Two kitchens that may need refitting.

So, should I buy two properties or one?

For greater diversification, consider two properties rather than one.

For lower maintenance costs and better tenants, consider one property rather than two.

Most profitable overall

You’ve considered your time and you do have time to commit to property. But in an ideal world, less hassle would be better.

You’ve considered how you will grow your portfolio and you have options. You do have other income you can save, but it would be great if the portfolio was self-funding too.

You’ve considered the risks and you’re comfortable with them. You hold an emergency fund and have other income streams to cover an unexpected cost or void period.

You’ve considered your goals and decided you want a balance of growth and cashflow. Your goals are long term, and you want whatever is most profitable overall.

So, should I buy two properties or one?

Overall, buying one better quality property is usually more profitable than buying two cheap ones.

Here are a few reasons why:

• Purchase costs are lower overall (fewer multiples of solicitors & broker fees etc).
• Lower refurb costs (half as many kitchens, bathrooms etc).
• Less ongoing maintenance (fewer boilers to service etc).
• Lower compliance costs (fewer gas safety, EICR, selective licences, etc).
• Better tenant profile (lower risk of voids, arrears, damages etc).
• Less admin & time cost (more time to focus on earning elsewhere).

If you would like help to choose the best option, Fintentional offers a property sourcing service. We help our clients to find the perfect properties to suit their goals and preferences.

We charge a flat fee per property, so even sourcing fees will cost less when you buy one rather than two!

A few caveats

There is a point where more expensive properties stop being a better investment because the numbers don’t stack up. This is because they won’t generate enough rent to cover the higher purchase cost.

Tenant demand can also be lower if a property is too expensive. This is simply because fewer people may afford to rent them.

As a guide, one house worth £250k is probably better than two each worth £125k. However, one house worth £500k is probably not as good as two worth £250k.

Cheap or expensive are relative terms depending on where you’re investing. An expensive property in the Northeast would be considered cheap in the South!

Stamp Duty Land Tax costs have a greater impact on higher value properties. This can restrict growth at the top end of the market. It’s important to check a stamp duty calculator to understand the costs for your purchase.

Like most things in life, extremes are rarely good and finding a balance is usually best.

If your budget only stretches to a cheaper property, you will usually be better to invest in one than not at all. It’s possible to get started with as little as £40-£50k cash to invest.

For any questions or some tailored advice, you can book a free call with us.