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One Bed or Two? A Must Read for Picky Property Hunters

Does it make more investment sense to buy a one bedroom unit or a two bedroom unit?  There's too much data and too many variables for an absolute answer.  But it's a question that's posed a lot.

Some investors focus on buying a unit with as many bedrooms and square footage as possible within their budget. They equate the 2nd bedroom - assuming it's a real 2nd bedroom - and a larger floor area with greater value. This is not always the case.

Whatever the property's price range may be, here are a few things to consider:

  • Neighborhood, Street, Building, and Unit Placement Heavily Influence Value. This sounds obvious but if the focus is strictly on price and the number of bedrooms, this can get lost in the shuffle.  Buying a  two bedroom for $450K in a South Boston 2-family is obviously different from buying a one bed for $750K at One Charles in the Back Bay.  Buying a unit on lowerNewbury Street is different from buying on upper Commonwealth Ave. Understanding the neighborhood at the street/building/unit level based on trusted sales and rental data  is key.  Unit placement is also critical. i.e. the resale potential and rental value of a 5th floor walk-up two bed for 750K vs. a one bed in an elevator building for the same price.
  • Projected Return Levels During Hold.  A good understanding of this data and competitive rentalproduct is extremely important. Thankfully, a lot of rental data in Downtown Boston is transparent.  An investor can position an acquisition for positive cash flow and project returns based on the rent number.  The rents will generally be higher for the 2 beds, but then so generally are the acquisition and carrying costs which affect the return.
  • Liquidity - A sound investment purchase begins with the exit plan.  While all real estate is illiquid, some knowledge of historical sales trends and neighborhood inventory turnover can enable educated projections for re-sale.  At minimum, we want some evidence that in a reasonable time period and without discounting, we can sell the property at will.  Given a one bedroom vs. two bedroom with comparable finishes and quality, appropriately priced to market in the same neighborhood.....which unit is likely to be the fastest, most straightforward sale in 5-7 years?

In the one bedroom corner: Generally lower price point, potentially larger pool of renters during the hold period, more buyers at the end of the hold period.  That means less vacancy time, and less time on market on the re-sell provided it's appropriately priced to market.

In the two bedroom corner: Generally higher rent, and more versatile utility value.  Many serious buyers will only consider 2 beds because they just prefer that extra room...for an office, regular guests and family members passing through town (this comes up very frequently). Possible greater potential for appreciation based on the utility value.

So... One or a two bed???  There are many other variables and no short answers, but as with other investment vehicles, whatever the number of bedrooms the purchase should align with an investor's goals and risk tolerance.

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