Your parents’ rite of passage may not make sense for you.
When the Baby Boomer generation was venturing into adulthood, it was common to buy a “starter home” — a modest, small dwelling. As their families grew and careers advanced, they moved into bigger or better homes.
Now, many people struggle to come up with the down payment for a first home. They may wonder if it’s smarter to wait and save more money so they can buy a home that makes more long-term sense, or go the other route, buying a starter home and planning to stay in it for more years.
It’s a personal, practical and financial decision, but here are some pros and cons of buying a starter home.
Pro: Build stability quicker
Lots of lessons come from homeownership. It exposes you to a new set of decisions and circumstances.
One surprise benefit that strikes most people is the stability they feel when they become homeowners. They might feel more grounded, and a part of a larger community.
After making a few cosmetic changes to make a home “theirs,” many new homeowners find they enjoy nesting at home, having friends over, and enjoying their own space.
Con: Buying twice means moving twice
Think you’ll be ready to upgrade in just a few years? It might be more cost-effective to save and stretch for the larger house, so you can stay in it longer.
Although mortgage rates are low, there are costs associated with buying and selling a home: title insurance, inspections, brokerage commission, along with a handful of loan fees.
Plus packing up and moving twice can be expensive and exhausting. Some prefer to pick one house for the long haul. While staying put and continuing to rent may seem wasteful in the short term, it might be a more strategic move.
Pro: Build equity sooner
Although not the guarantee it was a generation ago, odds are good that when you get into your first home, you can realize some equity. If you can commit to at least five to seven years, there’s a chance you can come out well ahead.
By making improvements that add value, you can take the equity you’ve built and apply it as a down payment on the next home. In essence, the starter home might help you purchase your dream home.
Con: You may spend more than you planned
There are soft costs to home ownership. Property taxes and mortgage payments aren’t the only expenses to owning. You’ll need to furnish your new home, purchase window coverings, and pay for landscaping improvements.
You’ll likely want to paint, refinish the floors, or change the carpet before moving in. And, you’ll surely make mistakes along the way by hiring the wrong contractor, making a poor landscaping decision, or mistakenly waiting to install the new AC condenser.
Some parts of homeownership are trial and error. It adds up. You might be better off avoiding those expenses by renting and saving for your long-term home.
Pro: Start realizing the tax benefits
When you own a home, the interest portion of your monthly mortgage payment can be written off, dollar for dollar against your income. If you spend $1,000 per month on mortgage interest, at the end of the year, you can deduct $12,000 off your taxes.
When you pay rent, the money goes to your landlord, and that’s it. The sooner you own, in theory, the faster you can save some money — perhaps toward your next home.
Con: Homeownership isn’t a sure thing
The world moves at a faster pace today, and that affects home values. Just a generation ago, people stayed closer to home, got married earlier, stayed married forever, and kept the same job through retirement.
Today, people choose to stay single longer, and may even purchase their starter home solo. Divorce rates are higher, the global economy moves people all over the world for work, and we prefer to stay more mobile.
That means homeownership may not be part of the equation. What happens if you buy your starter home and then get a job transfer, divorce, or the opportunity of a lifetime to live abroad? You might be stuck being an accidental landlord or selling your home at a loss.
It’s up to you
If you play your cards right, you can get into the starter home sooner rather than later and make a smart financial decision. If you buy the right first house, are open to building sweat equity, and plan to hang out there for five to seven years, there’s a good chance that you’ll have made a smart move.
This decision will enable you to get into a larger home, in a better neighborhood or school district, or maybe just your dream home.
Homeownership is a personal choice, and there is no one path to take. Stick within your comfort zone, and always go with your gut.
About the author
Brendon DeSimone is the author of Next Generation Real Estate: New Rules for Smarter Home Buying & Faster Selling. A 15-year veteran of the residential real estate industry and a nationally recognized real estate expert, Brendon has completed hundreds of transactions totaling more than $250M. His expert advice is often sought out by reporters and journalists in both local and national press. Brendon is a regularly featured guest on major television networks and programs including CNBC, FOX News, Bloomberg, Good Morning America, ABC’s 20/20 and HGTV. Brendon is the manager of the Bedford and Pound Ridge offices of Houlihan Lawrence, the leading real estate brokerage north of New York City.