Rental property investment can be expensive but rewarding. Real estate investors have different investment goals, strategies, and preferences.
When it comes to investing in income properties, which one is better: buying one pricey rental property or getting two cheap ones?
Reasons for Investing in Expensive and Cheap Rental Properties
As you may already know, several factors need to be considered in investing in a rental property. Most investors look at cap rates to determine whether a property is worth investing in or not. While cap rates are a good metric to use for determining a property’s profitability, they can be deceiving.
Thus, looking at cash on cash return rather than cap rate is a sound strategy because the former takes into account the financing option used to purchase the property. Cap rates work if the property is purchased in an all-cash transaction. But not everyone has enough cash sitting around to make that big a purchase. Since cash on cash return factors in the financing method, it gives investors a more accurate projection of potential returns.
However, an investor should not just stop at cap rates and cash on cash return. There are certain pros and cons involved in investing in one pricey property and a couple of low-priced ones.
The Pros and Cons of Investing in an Expensive Rental Property
One of the obvious benefits of investing in one expensive rental property is its appreciation rate. Generally speaking, the more expensive a property is, the better it appreciates as the years go by. In some cases, the money you can make off of a pricey property’s appreciation is a lot more than the combined profits of a couple of inexpensive properties.
Another upside of owning a rental property with a hefty price tag is that managing it is a lot easier compared to overseeing a couple of rental properties. You get to focus on only one rental property compared to having to stay on top of two rentals. It can be quite overwhelming if the investor also has a full-time job or business to take care of.
Of course, the major downside to this type of rental property is its price tag. Because of its price, a more expensive property does not have the same cash-on-cash return or even cap rate as owning two cheaper properties.
The Pros and Cons of Investing in Two Cheaper Rental Properties
Now, investing in a couple of cheaper rental properties also comes with its benefits and pitfalls. A cheap rental property is a lot easier to acquire, especially if you know where to find them and who to talk to.
Buying a rental property involves plenty of research and legwork. Spotting a good and inexpensive yet viable rental property is a lot easier than finding a high-priced property that is equally profitable. A couple of affordable rental properties give investors better profit for every dollar invested. And even if investors go through some financially challenging times, they have the option of selling one of their properties and holding on to the other to help tide them over. Considering how real estate appreciates (yes, even inexpensive properties do that) and how rental rates also typically go up, an investor can reduce the effects of financial hardship by selling one rental property and maintaining the other.
One downside to overseeing two rental properties is it can be very time-consuming. However, investors can easily tap a rental property management team to help them run things for a certain fee. Not all property owners have enough time and experience to run a rental business. A property management team can come in to help operate both rental properties to give the investor more time for other priorities and equally important pursuits.
Getting a couple of rental properties is also a great way of diversifying one’s portfolio even further. Rental properties go through seasons of stagnation and growth. Having more than one rental property and strategically spreading them out in different locations builds a buffer between these cycles. For instance, if you have two properties and one is vacant, you can still earn from the other rental home, whereas the financial impact of having only one expensive yet vacant property will greatly affect you.
While expensive properties are great for building equity, an investor with two inexpensive properties can also do the same, albeit at a much slower rate. With enough time and lots of hard work, investors can save enough money to buy other more expensive properties to add to their portfolio.
Lastly, perhaps the best thing about investing in two inexpensive properties as opposed to buying a million-dollar rental property is it gives regular folks, especially aspiring investors, the chance to get into real estate investing. This levels the playing field for all investors and gives regular folks a shot at building equity and generating a good income source.
Top Locations for Cheaper Rental Properties with Good Cash on Cash Return
While whether you invest in one expensive income property or two more affordable ones depends on your personal situation and preferences, the latter tends to come with more advantages. So, if you consider buying a reasonably priced investment property in 2022, we’ve provided you with a list of some of the best markets to do that.
According to Mashvisor, a real estate data analytics company, here are the best places to buy rental property that are both very affordable and have above-average cash-on-cash return rate when rented out as long-term or short-term rentals:
1. Altus AR
- Median Property Price: $97,760
- Average Price per Square Foot: $59
- Average Monthly Income for Long-Term Rentals: $778
- Cash on Cash Return: 7.27%
- Price to Rent Ratio: 10
- Average Monthly Income for Short-Term Rentals: $894
- Cash on Cash Return for Short-Term Rentals: 5.90%
2. Herrin IL
- Median Property Price: $104,443
- Average Price per Square Foot: $67
- Average Monthly Income for Long-Term Rentals: $644
- Cash on Cash Return for Long-Term Rentals: 3.15%
- Price to Rent Ratio: 14
- Average Monthly Income for Short-Term Rentals: $1,200
- Cash on Cash Return for Short-Term Rentals: 6.71%
3. Harper Woods MI
- Median Property Price: $122,611
- Average Price per Square Foot: $115
- Monthly Income for Long-Term Rentals: $828
- Cash on Cash Return for Long-Term Rentals: 3.23%
- Price to Rent Ratio: 12
- Average Monthly Income for Short-Term Rentals: $3,281
- Cash on Cash Return for Short-Term Rentals: 8.03%
4. Inkster MI
- Median Property Price: $127,414
- Average Price per Square Foot: $103
- Average Monthly Rental Income for Long-Term Rentals:: $1,200
- Cash on Cash Return for Long-Term Rentals:: 6.36%
- Price to Rent Ratio: 9
- Average Monthly Income for Short-Term Rentals: $2,045
- Cash on Cash Return for Short-Term Rentals: 8.48%
5. Del City OK
- Median Property Price: $127,484
- Average Price per Square Foot: $115
- Average Monthly Income for Long-Term Rentals:: $837
- Cash on Cash Return for Long-Term Rentals:: 4.52%
- Price to Rent Ratio: 13
- Average Monthly Income for Short-Term Rentals: $1,320
- Cash on Cash Return for Short-Term Rentals: 5.14%
So What’s the Verdict?
Realistically, investors have different goals and preferences when it comes to real estate investments. The choice between investing in a million-dollar rental property and a couple of cheap ones is largely dependent on the investor’s vision and reasons for investing.
And while the scales my tip towards getting a couple of cheaper investment properties, in the end, you should buy a property that is within your means as long as it can generate a positive cash flow and good cash on cash return. Even if it’s a cheaper investment, you can still build equity over time and save up enough money to buy a pricier income property in the future. Plus, cheaper rental properties usually come with affordable rental rates that won’t drive people away and keep the demand up. Overall, it is better to have a couple of high-demand properties than a high-end one.