Money Advice

Should You Buy a Starter Home as a First-Time Home Buyer?

Shopping in your first residence may be a bit discouraging, particularly in a scorching housing market like Boston or the San Francisco Bay Area. In these areas, even modest single-family houses generally promote for upwards of half a million {dollars}. For many Millennials, even elevating the down cost on a home that costly looks as if a pipe dream.

If you’re on this position, the important thing to proudly owning your dream home sooner or later could possibly be to purchase a residence that isn’t your dream home proper now. By making your first residence buy a cheap “starter home,” you possibly can build up fairness you can money in to purchase your “forever home” a few years down the street.

Buying a starter house is a frequent technique for first-time residence patrons looking for to interrupt into the housing market. However, some consultants warning that it’s not the appropriate determination for everybody. Depending in your state of affairs, you might be higher off persevering with to hire and saving up your money till you’re able to make the leap in your ceaselessly residence.


Here’s what you want to know in regards to the pluses and minuses of shopping for a starter residence and learn how to determine whether or not it’s the appropriate transfer for you.

Types of Starter Homes

Attached Homes Townhouse Trees

A starter residence wants just one key function: a record worth that’s effectively under the common in your space. There are a number of sorts of houses that match into this class, together with:

Attached Homes

Any attached-unit residence, which shares at the very least one wall with one other residence, is more likely to price lower than a stand-alone home. This class contains condos, townhouses, co-ops (a type of cohousing), and semi-detached houses, such as half of a duplex.

Small Houses

Some stand-alone homes are priced under common as a result of they’re too small for many households. With the common dimension of latest U.S. houses at 2,426 sq. ft, in keeping with the U.S. Census Bureau, homes as giant as 1,500 sq. ft may be thought of small homes. The most excessive examples are tiny homes, which have not more than 400 sq. ft of space and price a lot lower than full-sized houses.

Fixer-Uppers

Other homes promote for lower than common as a result of they’re not in the very best situation. Buying considered one of these fixer-uppers and sprucing it up may be a nice strategy to build fairness, particularly if you happen to’re in a position to do the repairs your self. However, renovating and repairing a fixer-upper takes a lot of labor and sometimes a lot of money, so you want to assume it via fastidiously earlier than making a home like this your first residence buy.

Homes in Less Desirable Areas

Finally, some homes are priced under common due to their location. Less fascinating places embrace high-crime neighborhoods, areas with subpar faculty districts, and suburban houses with a lengthy commute into town. However, relying in your state of affairs, these “undesirable” places may not be a downside for you. For occasion, the varsity district doesn’t matter if you happen to don’t have children and don’t plan to have any quickly, and a prolonged commute isn’t a difficulty if you happen to’re a freelancer who works from residence.

Advantages of Starter Homes

Rising Home Prices Scissor Paper Houses

The major benefit of shopping for a starter residence is that it helps you get your foot within the door of the true property market. When you purchase a residence, a portion of every month-to-month mortgage cost goes towards increase fairness – that’s, the share of the property that belongs to you. Just a few years down the street, you possibly can promote the home, money in that fairness, and put it towards the acquisition of your ceaselessly residence.

Here are a few of the particular issues shopping for a starter residence can assist you do.

1. Cash In on Rising Prices

Normally, constructing fairness in a home takes a very long time. When you first begin making mortgage funds, most of every cost goes towards curiosity on the mortgage, with solely a small portion going towards fairness. However, if you happen to reside in a scorching housing market the place costs are rising steadily, it’s a completely different story. From the very first day you purchase it, the worth of your new starter residence will enhance, and your fairness will rise together with it.

A 2018 research by GOBankingRates recognized 20 U.S. cities the place residence costs had risen by greater than 10% within the earlier year. If costs proceed to extend at that very same rate, a $200,000 residence bought in a type of cities right now could possibly be value over $322,000 in 5 years. That would provide you with an additional $122,000 to place towards the acquisition of your ceaselessly residence.

If you reside in considered one of these scorching housing markets, shopping for a starter house is your greatest likelihood to get in on the bottom flooring and put these rising costs to give you the results you want. If you sit on the sidelines and wait till you possibly can afford your dream residence, there’s a threat that skyrocketing residence costs will outpace your revenue progress, protecting your dream simply out of attain.

2. Take Advantage of Low Interest Rates

As of September 2018, the common curiosity rate for a 30-year mortgage was 4.9%, in keeping with Bankrate. That’s greater than it was simply a year in the past however nonetheless comparatively low by historic requirements.

Buying a starter residence now offers you a likelihood to change into a house owner and begin constructing fairness whereas it’s nonetheless pretty inexpensive. If you wait a few years to purchase your ceaselessly residence, charges could possibly be a lot greater, and your dream residence may now not suit your funds.

3. Save on Expenses

Starter houses aren’t simply cheaper to purchase; they’re additionally cheaper to personal. Several sorts of bills are decrease with a starter residence, together with:

  • Property Taxes. The quantity of property taxes you pay often will depend on the worth of the property. Thus, the cheaper your own home, the smaller your tax invoice.
  • Utility Bills. Because starter houses are often smaller than common, they price much less to warmth and funky. That helps you save on your utility payments.
  • Maintenance. Unless you purchase a fixer-upper, your starter house is more likely to have decrease upkeep prices. That’s since you’ll merely have much less space to take care of: a smaller roof, a smaller yard, and smaller rooms.

The money you save on these bills can go into your own home fund, prepared that can assist you buy your ceaselessly residence.

4. Resell When You’re Ready

When the time involves promote your starter residence, you may be fairly assured of discovering a purchaser shortly. There’s all the time loads of demand for starter houses since they’re such a in style selection for first-time residence patrons.

According to Trulia, competitors for a dwindling provide of starter houses prompted the median record worth for these houses to rise by practically 10% between 2017 and 2018. If this development continues, you should not have any hassle promoting your starter residence after a few years for a tidy revenue.

Disadvantages of Starter Homes

Wooden Home Cash Bag Outdoors

Despite the benefits, shopping for a starter residence isn’t a no-brainer. There are some issues concerned in any residence buy, plus a couple of different issues particular to starter houses.

1. Higher Cost Than Renting

Although starter houses are cheaper than bigger houses, they nonetheless price greater than many leases. According to Trulia, the mortgage funds on the common starter residence in 2018 would eat up over 40% of the common first-time purchaser’s revenue. On high of that, proudly owning a home comes with prices that renting doesn’t, such as property taxes, upkeep, householders insurance coverage, and presumably greater transportation prices if you happen to transfer out to the suburbs to search out a home you possibly can afford.

Add up all these bills, and the month-to-month price to personal a starter residence could possibly be fairly a bit greater than you’d pay to hire a residence of comparable dimension. You could be higher off persevering with to hire and investing the additional money so you possibly can put it towards your ceaselessly home afterward.

2. Limited Choices

The excessive demand for starter houses means you don’t get a lot of selections when shopping for one. Trulia notes that even as costs for starter houses have risen, their high quality has declined. The common starter residence right now is smaller, older, and extra more likely to be in want of restore than it was six years in the past.

It’s additionally arduous to search out starter houses in essentially the most fascinating neighborhoods. Buying one may power you out into the suburbs away out of your job and your folks. This, in flip, may add as much as a for much longer commute and doable social isolation, two main sources of unhappiness.

3. Risk of Falling Prices

As the true property crash of 2007 to 2008 proved, property values can go down as effectively as up. If the housing market drops quickly after you purchase your starter residence, you may all of the sudden end up caught with a residence that’s value lower than you paid for it.

If this occurs, your starter residence may flip into your “for the foreseeable future” residence. Instead of promoting it for a revenue and buying and selling as much as your ceaselessly residence, you might find yourself having to remain there till the market recovers. Fortunately, the always-high demand for starter houses means you may not have to attend as lengthy as individuals residing in greater homes.

4. Capital Gains Taxes

When you purchase a starter residence, you’re in all probability anticipating to reside in it for at the very least a few years earlier than buying and selling up. However, generally life throws you a curve ball. For occasion, perhaps your job transfers you to a different metropolis and you need to transfer. Or perhaps you all of the sudden uncover you’re having a child, and your starter house is now too small in your rising household.

Unfortunately, if you find yourself having to promote your starter residence in a hurry, you might face a steep tax invoice. Normally, whenever you promote your main residence, you can also make as much as $250,000 in revenue, or $500,000 for married {couples}, with out having to pay capital good points tax. However, this exemption solely applies to a home you’ve lived in for at the very least two of the final 5 years. So, if there’s a likelihood you gained’t have the ability to preserve your starter residence for at the very least two years, shopping for it may not be definitely worth the threat.

Factors to Consider

Piggy Bank House Budget Cost

Buying a starter residence isn’t a one-size-fits-all resolution. Whether it’s best for you will depend on your way of life, location, and funds. If you’re enthusiastic about shopping for a starter residence, listed here are some elements to contemplate.

1. Your Budget

Before taking the plunge on any residence buy, you want to work out how a lot home you possibly can afford. To decide this, take a look at all the prices of shopping for a residence, not simply the down cost. Experts such as Neale Godfrey of Forbes and Julie Park, a actual property agent interviewed by U.S. News and World Report, warn that first-time residence patrons usually underestimate closing prices and different bills of homeownership, such as:

  • Property taxes
  • Maintenance, repairs, or renovations (particularly in the event that they’re shopping for a fixer-upper)
  • Homeowners insurance coverage
  • Utilities
  • Yard care
  • Moving prices
  • Transportation prices (in the event that they’re shifting from town to the car-dependent suburbs)

That’s a lot of things to contemplate, however there are instruments that may assist. First, seek the advice of a residence affordability calculator, such as this one from NerdWallet. It appears at your revenue, different money owed, location, and down cost to determine how a lot you possibly can spend on a home with out overstretching your funds. The website additionally has a instrument that can assist you calculate your closing prices.

To calculate transportation prices, try the H+T Affordability Index. It exhibits what proportion of their revenue residents in a specific space usually spend on housing and transportation. It may also present particulars such as the common variety of vehicles per family and the common price of proudly owning a automobile. This is very helpful if you happen to’re evaluating houses in numerous areas.

To estimate shifting prices, strive the Moving Cost Calculator from Moving.com. It can present you the approximate price of a transfer primarily based on location, residence dimension, and companies. Finally, to determine your general possession prices, take a look at the Home Cost Calculator from Angie’s List. If you enter a residence worth, mortgage mortgage particulars, and site, it may give you an estimate of prices like utilities, property taxes, insurance coverage, and repairs.

2. Your Local Real Estate Market

Once what it will price you every month to personal a home, you possibly can crunch some numbers to see how that compares to the price of renting and which is more likely to profit you extra in the long run. Here are some inquiries to ask:

  • How Does Renting Compare to Buying? If you’re at present renting a residence, add up the quantity you’re spending proper now – together with hire, utilities, and transportation – to reside the place you reside. Then evaluate that to the overall quantity you’d spend every month if you happen to purchased a starter residence. If you don’t pay hire now, or if you happen to’re shifting to a completely different space, you possibly can try rental prices in your chosen neighborhood on Trulia.
  • Are Home Prices Rising or Falling? If residence costs in your space are rising, shopping for a starter residence right now could possibly be a good funding as a result of you possibly can in all probability promote it for a revenue in a few years. However, in the event that they’re falling, there’s a good likelihood you gained’t get again the money you set into your starter residence when it’s time to promote. It could be a higher concept to attend till the market bottoms out so you should purchase on the best way up. To see which approach residence costs in your space are trending, go to Zillow and search for the situation of your present residence or a doable starter residence you’re curious about shopping for. Click on “Zestimate history and details” to see how your property’s worth and normal residence costs within the space have modified over the previous a number of years, as effectively as how they might change over the following year.
  • Are Interest Rates Rising or Falling? If rates of interest are on the rise, shopping for a home now offers you a likelihood to get your mortgage whereas they’re nonetheless comparatively low. However, in the event that they’re falling, you might save money by ready a bit longer.
  • What Could You Make Investing Your Money Elsewhere? Even if residence costs are rising, a starter residence isn’t essentially the very best funding you might make. If renting is less expensive than shopping for, you may do higher renting and investing the additional money elsewhere. Look on the present yields for low-risk investments, such as CDs, Treasury securities, and municipal bond funds. Then use an funding calculator, like this one from Bankrate, to determine how a lot you might make with considered one of these investments over the following few years. If it’s greater than the quantity your starter house is more likely to develop in worth, renting and saving is a higher discount.

3. Your Current Needs

By definition, a starter house is one you aren’t anticipating to reside in for the long run. So yours doesn’t must be large enough for the six children you anticipate to have some day or be in a neighborhood with the very best colleges for these children. However, it does must be a place you might be blissful residing in for the following few years.

One of a very powerful elements is location. Homes in or close to town heart often price extra, particularly in the event that they’re in upscale or fashionable neighborhoods. Moving out to the suburbs offers you extra space in your housing greenback, however that doesn’t essentially imply it’s a good concept. If you completely love your present neighborhood – or if you happen to actually hate the concept of a lengthy commute – you’ll be happier staying in that neighborhood, even when it means persevering with to hire till it can save you extra money.

Another risk is to remain near town heart however select a smaller residence, such as a condominium or townhouse. Again, that is a question of what’s most vital to you. If you like being within the coronary heart of town and residing a car-free way of life, a rental in a metropolis neighborhood could possibly be a good selection. However, if what you need out of your subsequent house is a yard the place you possibly can plant a backyard or let your canine run round, a rental gained’t be a good match for you.

4. Your Future Plans

According to a 2015 U.S. News story on starter houses, consultants usually agree that it’s not a good concept to purchase a home until you anticipate to reside in it for at the very least 5 years. That means before you purchase, you want to think about not solely your present way of life but in addition your plans for the longer term.

For occasion, if you happen to plan to lift a household sometime, take into consideration how quickly you wish to begin. A tiny one-bedroom cottage may appear like the best starter residence for you otherwise you and your partner. However, if there’s a likelihood you’ll be citing children there, you’ll in all probability want extra space – and meaning extra money.

Similarly, if you have already got at the very least one baby, think about the native faculty system. If your baby will likely be beginning faculty when you’re in your starter residence, it must be in an space with good colleges, which may also add to the worth. That’s one thing you’ll should consider when determining the relative prices of shopping for and renting.

If your plans for the longer term are up within the air, shopping for a residence will not be a good concept proper now. For occasion, if you happen to’re working at a company that might all of the sudden relocate you throughout the nation with solely a few months’ discover, that doesn’t provide you with a lot time to promote your own home. You may find yourself having to promote at a loss, and if it’s been lower than two years since you obtain the home, you might even owe capital good points taxes.

Tips for Buying a Starter Home

Pre Approval Calculator House

Even if you happen to’re certain shopping for a starter house is the appropriate transfer for you, it’s greatest to proceed with warning. Take the time to plan your buy and discover the appropriate starter residence, in the appropriate neighborhood, on the proper worth.

Here are some ideas from the consultants on searching for a starter residence.

1. Plan Ahead

When you purchase a starter residence, do not forget that you intend to promote it and transfer on finally. Before you even purchase the home, it is best to have an concept of how lengthy how you plan to reside there and what you intend to do with it whenever you transfer out.

Will you promote the home or hire it out and change into a landlord? Figuring this out forward of time will enable you make strategic selections about which neighborhood to decide on and learn how to preserve the home. For occasion, if you happen to plan to promote it will definitely, you’ll wish to select residence enchancment initiatives that add worth for future patrons. If you’re renting it out, you may select finishes that require much less upkeep sooner or later.

2. Get Pre-Approved

Mortgage lenders suggest lining up your property mortgage earlier than you begin searching for a home. The strategy of getting authorized for a mortgage can take a very long time, and also you don’t wish to threat lacking out on the proper residence when you’re scrambling to safe financing. Having a pre-approval letter from a well-known, native mortgage lender will make you way more interesting to sellers, enhancing your odds of getting your excellent starter residence as soon as you discover it.

3. Choose the Right Neighborhood

Since you’ll be residing on this residence for at the very least 5 years, it’s vital to decide on a location that matches your wants. Depending in your way of life, that might imply an up-and-coming neighborhood within the coronary heart of town or a family-friendly suburban location.

Another issue to contemplate is whether or not the neighborhood will attraction to future patrons or tenants in a few years. A house in a fascinating location will likely be a lot simpler to promote or hire out after you progress on.

4. Stick to Your Budget

Experts warn in opposition to spending an excessive amount of on a starter residence. It’s simple to get swept off your ft by a massive home with fabulous facilities, however the entire level of shopping for a starter house is to maintain it inexpensive. Straining your funds an excessive amount of now may harm your credit score rating, making it tougher so that you can get a mortgage whenever you’re prepared to purchase your ceaselessly residence.

5. Pay Attention to Expenses

When you’re making an attempt to determine whether or not a starter residence suits your funds, don’t look solely at its worth. Make certain to issue within the closing prices and prices of possession, such as upkeep and property taxes. In specific, think about the price of repairs and renovations if you happen to’re shopping for a fixer-upper. By the time you end rewiring the home, including a second rest room, and redoing the kitchen, it may find yourself costing as a lot as you’d have spent shopping for your ceaselessly residence proper off the bat.

6. Get a Thorough Inspection

home inspection is a essential a part of the home-buying course of. If doable, accompany the house inspector and take notes so that you’ll have a clear concept of what situation the home is in. This will assist you determine whether or not you’ll want to exchange something massive, such as the roof or the furnace, through the time you personal the home. If you discover that any main programs are on their final legs, ask the vendor to decrease the worth to make up for the price of changing them.

7. Be Flexible

Don’t anticipate your starter residence to have all the things in your want record. After all, you gained’t be residing there ceaselessly. Figure out what’s completely important to you, such as the appropriate location or a yard, and be prepared to compromise on the remainder. Also, do not forget that if a home usually suits your wants however lacks one function you need, such as a storage or a deck, you possibly can all the time add it. Just make sure to work out how a lot the addition will price and issue that into the acquisition worth earlier than deciding if the house suits your funds.

8. Don’t Over-Improve

Although you possibly can enhance your starter residence to make it suit your wants higher, consultants warning in opposition to upgrading it too far. If you set an excessive amount of money into your starter residence, you might not have the ability to get better that money whenever you promote. Focus on residence enhancements that add worth to your property and don’t put a lot of money into deluxe kitchens and baths that gained’t pay you again.

Final Word

If you’re nonetheless undecided if shopping for a starter house is the appropriate transfer for you, don’t do it – or at the very least, don’t do it proper now. Buying your first house is a massive determination, and it is best to take on a regular basis you want to think about your choices. Continuing to hire for a short while longer can’t actually harm you, however shopping for a home that doesn’t suit your way of life or your funds is a arduous determination to undo.

Most importantly, don’t purchase a home simply since you really feel like that’s what you’re “supposed to do” at this stage in your life. Just as a result of shopping for a home is the appropriate transfer for many of your friends doesn’t imply it’s the appropriate transfer for you. Your life and circumstances are distinctive, and solely you possibly can determine whether or not turning into a house owner is smart for you at this level in your life. Deciding to hire now doesn’t rule out shopping for afterward; the housing market will nonetheless be there everytime you’re prepared.

Which would you relatively do: purchase a starter residence and commerce up, or wait till you’re prepared to purchase your ceaselessly residence? Why?


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