One $1M Commercial Property or Two $500K Properties?

A common question I receive from investors is whether it's better to purchase a single $1 million commercial property or two properties valued at $500,000 each. While the answer may seem straightforward, the reality is more complex, and the best choice depends on several key factors.

Understanding the Differences

In residential real estate, the approach to property selection is vastly different from commercial investments. Residential properties typically rely on market appreciation, whereas commercial properties are valued based on income potential, lease terms, and tenant quality.

When considering two $500K properties, investors must be mindful of the typical lease structures in this price range. Smaller commercial properties often come with shorter lease terms—typically around three years at best—and are more likely to attract small businesses, startups, or trade-based tenants. While some of these businesses will succeed and grow, others may struggle, leading to a higher risk of tenant turnover.

On the other hand, a $1M commercial property often attracts more established tenants and allows for longer lease agreements—commonly five years with renewal options. Additionally, a freehold property in this price range offers greater control over the asset, giving the owner more opportunities to add value, whether through renovations, subdividing space, or repurposing areas for additional income.

The Advantages of a Single $1M Property

Investing in one higher-value property presents several benefits:

Stronger Tenants & Longer Leases: Larger properties tend to attract more established businesses willing to commit to longer lease terms, reducing vacancy risk.
Greater Control: With a freehold property, you are not restricted by strata rules and can make value-adding improvements as needed.
Higher Value-Add Potential: There are more ways to increase income, whether by leasing unused space, enhancing infrastructure, or optimizing rental terms.
More Stability: A single high-quality asset generally presents fewer management challenges than two smaller properties with potentially higher tenant turnover.

The Case for Two $500K Properties

While a single $1M asset may be the preferred choice for many, there are some advantages to splitting the budget between two properties:

Diversification: Having two properties in different locations or sectors can spread risk.
Multiple Income Streams: If one tenant vacates, the other property may still generate rental income.
Entry into the Market: For investors looking to build experience, managing two smaller properties may provide a learning opportunity.

The Bottom Line

While owning two smaller properties can offer diversification, the benefits of a larger, single investment often outweigh the risks. The ability to secure longer leases, attract higher-quality tenants, and have full control over the asset typically results in better long-term growth and stability.

What are your thoughts? Would you prefer to invest in one high-value asset or diversify with multiple smaller properties? Share your perspective in the comments below or send me a text message 0410 694 633!