Should I Use My Deposit Pot to Buy One or Two Properties?
This week’s video sees Rob answer Ravi, who wants to know whether it would be better to invest his deposit pot into one property or spread it across two.
The answer to this is that it will depend on your overall strategy, your approach to risk and your tenant profile. Managing one property can save on maintenance and management costs but leave you more exposed, whereas managing two properties can potentially incur more costs but spread that risk out a bit.
There is no singular, right answer but there is a process you can follow to discover what is right for you.
Hello and welcome to Property Investments UK. Today we're going to be looking at a client's question. This is regarding whether you should buy one property or two properties with your deposit pot, so whether you should split that pot and buy low-value properties, or use one deposit to buy a larger value property.
So the question is...
"Hi, Rob. I'm going to ask a tricky question. I'm trying to get to a stage where I've got, say, forty thousand pounds to play with. Would it be wise to place a fifteen thousand pound deposit on, say, two properties worth a hundred thousand pounds, so, fifty thousand each, or thirty thousand pounds on one hundred thousand pounds home? Both leaving money left over for closing costs and another potential sale. I don't want to apply the flip strategy, as I just don't have time for this. I'm adopting a more buy and hold. As you've been in the game, I would like to know what you would do in this situation. I know there could be other factors involved, but I'd like to get your perspective. (Anything would help.) Regards, Ravi."
Okay, Ravi, so first of all, I'm not a financial advisor or a mortgage broker, so specifically around trying to raise finance to purchase those properties, and what mortgage product is going to be better for you, I'd recommend speaking to a broker (for more information see our article on the secret to successfully raising property finance). When it comes to whether we'd focus on buying two properties or one property with the same deposit pot, there are a couple of things to consider.
Management and Maintenance
Really, it is quite difficult, because it does come down to personal choice. I'll try and explain the reasons for that. First of all, if you just have one property - so you own one property for a hundred thousand pounds - you then only have one tenant, one lot of maintenance issues, one roof, one boiler, all those things you have to consider as the owner of the property. That's one thing - the management and the maintenance aspects of owning one property as compared to owning two.
If you then look at the figures side of things... Say you have a hundred thousand pound property that has a 10% discount on it when you purchase it, and it has around an 8% rental yield. The alternative would then be to have two fifty-thousand-pound properties. These again have the same 10% discount when you buy, and they have the same rental yield, so they equate to the same value as one property worth one hundred grand.
There are two schools of thought on this. Some investors will go down the route of just having the one property. The figures are exactly the same, with the discount and the yield... but with only the one property you've only got one tenant and one lot of maintenance costs.
Spreading Location-Based Risk with Two Properties
The other school of thought that some investors prefer is to invest in two properties. This is because that spreads the risks in terms of location.
So, if one particular area or street or postcode doesn't increase in value the same as another, or it goes down in value more than another - a period of recession or prices changing - there's a little bit more of a risk spread across the board.
Also, if your roof goes on one property - an older property... If you have two properties that are slightly newer or have slightly better condition roofs, then you spread that risk again there.
Looking at your Individual Aims, Goals and Tenant Profile
The way in which we would approach this is by looking at individual aims and goals, and that's what I'd suggest for yourself. Try and sit down, look at what your personal aims are, not just over the long term, but also the medium and short term. Look at the tenant profile that you're looking to focus on. If you want a working tenant in the property, or a student, or a local housing allowance tenant, then the two properties might not match that requirement. If you go with two properties that are fifty thousand pounds each and you want working tenants, then you might not be able to achieve that in the locations of these two properties.
Letting your Strategy Decide
Focus on your goals. Focus on your tenant profile, as we've mentioned. Based on that, the answer is probably going to come a little bit more naturally and it's your strategy that might point you in the direction that you're looking to go.
If you want to take less risk, not have as many potential maintenance hassles, or tenant hassles, go down the one property route and if that works for your tenant profile, perfect.
If you're the type of person that wants to spread the risk over areas, so two properties, different locations, a potential benefit from capital growth by being not just focused on the one location (there are different risk elements to consider, you see?), then maybe two properties might be a better choice... again, as long as that fits your aims and tenant profiles.
Looking at Cash Flow and Rental Income
Hopefully, this helps explain a little bit why it's not just a straightforward answer. Personally, what we tend to do is focus on the rental income. We make sure that all the properties we look at are cash-flowing. That's whether it's a hundred thousand pound house or a fifty thousand pound house, or a million-pound house. We want to be sure that there's a cash flow element to that property deal. Sometimes this is the consideration that creates, gives us, the answer that we're looking for in a property. It's not perfect; it's not a case of saying, "You should choose one property," or, "You should choose two properties," but it's cash-flow that should be shaping your ideas.
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