One of the most common questions I hear from investors is whether it makes sense to hold onto a collection of smaller properties or sell them off to step up into something larger. At first glance, the idea of trading several smaller investments for one big property might feel risky. But when you break it down, there are clear advantages to making the leap – if the timing and numbers work in your favor.
Why Timing is Everything
If you’re thinking about selling a smaller property to buy a bigger one, the very first thing to evaluate is timing. Real estate transactions come with closing costs, and those costs show up on both ends of the deal. You’ll pay when you sell, and you’ll pay again when you buy.
That means your current property needs to have appreciated enough to make up for those costs. If you try to move too quickly, you may find yourself eating into your profits. Appreciation is what bridges the gap. Give the property enough time to grow in value, and that growth can cover your costs and then some.
This is not something you want to do every year. The expenses add up quickly, and too much turnover can stall your portfolio growth instead of accelerating it. But at the right time, stepping up can be a powerful strategy.
The Bigger Bite of Appreciation
The most obvious benefit of moving into larger properties is the scale of appreciation. Let’s say you own a four-unit property worth $600,000. If the property is appreciating at 3% per year, you’re gaining about $18,000 annually in value.
Now imagine you sell that property and buy a fifteen-unit building worth $1.5 million. At the same 3% appreciation rate, that larger property is gaining about $45,000 per year. The percentage is the same, but the dollar figure is much more impactful.
This larger bite of appreciation compounds over time. As rents increase, values rise, and you pay down debt, you’re building wealth faster and faster. Appreciation is one of the strongest reasons investors decide to make the jump from smaller assets into bigger ones.
Depreciation and Tax Benefits
While appreciation is working in your favor, you also get benefits from its opposite: depreciation. Again, depreciation’s impact grows with the property size.
When you purchase real estate, the IRS allows you to depreciate the building over a set schedule. This depreciation is a non-cash expense that reduces your taxable income. The larger the property, the greater the depreciation allowance.
That means you can shelter more of your rental income from taxes. For investors in higher tax brackets, the savings can be substantial. Depreciation does not change the actual cash you take in each month, but it can significantly improve your after-tax returns.
Better Debt Terms
Another advantage to stepping up is financing. Smaller residential-style loans often have stricter requirements and shorter amortization schedules. Larger commercial properties, on the other hand, tend to qualify for more favorable terms.
Lenders are often willing to offer:
- Lower interest rates
- Longer amortization periods
- Flexible loan structures that match the property’s income stream
Better terms mean more predictable cash flow and less financial strain. Over the life of the investment, that difference can be just as valuable as appreciation or depreciation benefits.
Weighing the Trade-Offs
Of course, larger properties also come with more responsibility. You’ll be managing more tenants, bigger maintenance needs, and potentially more complex lease structures. Some investors prefer the simplicity of a handful of smaller assets and are willing to trade the financial growth possibilities of larger properties for the relative ease of smaller investments. The key is making sure the step up aligns with your overall strategy.
Conclusion
So, is it worth selling a smaller property to buy a bigger one? For most investors, the answer is yes. Larger properties give you access to bigger appreciation, stronger tax benefits, and better loan terms. As long as you have allowed enough time for your smaller property to build equity and cover the cost of the transition, stepping up cna be one of the most effective ways to grow your portfolio and accelerate long-term wealth.
