The question is: Can she lose money for next 5-7 years?

Choice 1 may appreciate less in the future, but choice 1 can appreciate just when choice 2 will if future economic condition improves. The only difference is that choice 1 will return less. Choice 1 will appreciate nonetheless in the future.

However, choice 1 will make you cash flow positive for the next 5-7 years. You lose nothing out of pocket.

Choice 2 will definitely cause you to lose money slowly month by month, year by year. For the next 5-7 years it will be a losing business.

Using the money to buy choice 2, you may buy 2 choice 1, double the position and they are all positive. So, 2 houses of choice 1 will most likely beat the 1 house of choice 2 in future appreciation. And Choice 1 will guarantee you won't lose money for the next 5-7 years.