Do like you want and what makes less hassle. Both decisions can be reverted: The directory in the repository can be extracted and imported to a new repository, or the separate repository can be imported into the first one. I don't think any of the approaches is significant better. So choose freely. I think your decision will mainly be influenced by the question, who has access to project1 and project2. If this are the same users you are fine with one repository.
At work we are a little team (less than 10 developers) and have chosen to put all projects into the same repository with different subdirectories.
EDIT: As I talked about someone else about it, I discovered one problem: The possibility to freely move projects between repositories is limited to users, which have administrative access to the repository. As someone who decides if a projects gets a directory or a repository of it's own administrative access is likely. But if you cannot the repository in this way, it gets hard or impossible to later move the project to another repository. In this case this question has to be considered more carefully.