Size matters: Investing in a big house vs. a small house

Isn’t having additional space always a wonderful thing? No, not exactly. What you gain by investing in a larger property will come with a lot of additional charges that you may not have considered previously, such as higher maintenance fees for additional square footage.

Although most of us will eventually outgrow our homes as our families grow (especially those of us who live in multi-generational households), moving our entire family to a larger house can be pricey.

On the other hand, if you are considering moving into a larger house simply because it seems like a good idea, you should give it some more thought before making the leap.

Advantages of investing in a large house

Higher Rental Income: If you intend to rent out the property, investing in a larger house can attract a higher rental income than a smaller one. Larger homes frequently attract families or tenants who want to co-share the space with others, which can lead to higher rental returns.

Appreciation Potential: A larger home could actually save you more money. This can seem counter-intuitive due to the higher monthly installments and the bigger utility bills, but a larger home will more likely enjoy a higher capital appreciation over time, especially in desirable locations.

Diversification: Owning a big house can help diversify your portfolio. In general, real estate has a low correlation with other major asset classes such as equities and bonds, which can help spread risk.

Flexibility of Use: A big house can offer more versatility in how you utilize the space. It can serve as a multi-generational home for a large family or be used as a vacation home for extended family gatherings.

Lower Price per Square Foot: Larger homes typically cost more overall than smaller ones in the same area but often have a lower price per square foot than smaller homes.

However, it is equally important to remember that investing in a large property has significant drawbacks:

Higher Purchase and Maintenance Costs: Larger houses often have higher upfront costs, including a larger down payment and more maintenance fees.

Limited Pool of Tenants or Buyers: As not everyone is seeking for a large property, the market for potential tenants or buyers may be smaller.

Market Demand: The demand for large houses can rise or fall in response to economic growth and income. If demand for larger properties falls, it may take longer to sell or find tenants.

Property Management Challenges: A larger property might be more complicated and time-consuming to manage. Maintenance, repairs, and tenant management may require extra time and money.

Investing in a smaller residence, on the other hand, often costs less and frees up money each month to spend on maintenance costs. However, it is not just the lower mortgage payment that will save you money; there is also a price difference between a two-story house and a single-story house in terms of the electric bill.

Advantages of investing in a small house

Affordability for Tenants: Smaller houses may attract a wider range of renters. This can broaden the pool of prospective tenants and shorten vacancy periods.

Higher Rental Yield: Small houses can give a higher rental yield, which is the rental income proportional to the property’s value, due to their lower purchase price. As a result, you may receive a bigger return on your investment than with a larger property.

Flexibility of Use: Small houses can be used in a variety of ways. They can serve as a home office for start-ups, a starter home for singles or couples, or a downsizing home for retirees.

Portfolio Diversification: If you currently own larger properties, including a modest property in your investment portfolio can provide diversification. It spreads risk and allows you to appeal to different rental market segments.

Easier Exit Strategy: In a slow market, selling a small house may be easier than selling a larger property, as the affordable price may appeal to a wider spectrum of prospective purchasers, making it easier to find a suitable buyer when the time comes to sell.

However it is important to recognize that investing in a small house also has its limitations:

Limited Rental Income: While small residences may have better rental yields, their absolute rental revenue may still be lower than that of larger properties.

Market Demand: The demand for small houses varies depending on the location and target market. It is necessary to research the market to ensure there is sufficient demand for smaller rental properties in that particular area.

Future Growth Potential: Smaller homes may have less growth potential in certain areas and may not provide significant long-term appreciation.

Finally, the decision to invest in a property, big or small, should align with your investment strategy, financial goals, and risk tolerance. It is also important to study the local market conditions, and consult with real estate experts before making any significant investment.