Tired of renting? If you're like many young Americans, you're tired of paying someone else's mortgage and ready for your first single-family home, lovingly referred to as starter homes. After all, it's the start to the great American Dream, right?
Eh, maybe not.
If you're thinking of buying a starter home, read this. We'll help you decide if it's really worth investing in a starter house or if you should hold off a little bit longer to get your forever home.
What are starter homes?
A starter home is the term that many use for their first home. This starter home may not have all of the bells and whistles, especially since those buying the homes are fresh in their careers and haven't had the chance to save much money.
The average starter home in the US has three bedrooms and two bathrooms, compared to the "forever home" that has two floors and around five bedrooms.
Many people buy a starter homes as a way to get their feet wet in the real estate market. They don't necessarily plan on living in it long term, but they have typically been watching the real estate market climb and want to lock it in while the mortgage rates are low.
Starter Home: Dream Home on Scale?
To those sitting in a tiny apartment or who are renting the same house that they've lived in for the last three years, having your own home is exciting! Buying a home means you can paint it whatever color you want, finally decorate it how you want, and finally buy that furry friend you've been longing for.
Although it may seem lovely, let's take a look to see exactly what is involved in a starter house.
The Cost of a Starter Home Purchase
Home ownership is a badge of honor for many Americans. They pay that monthly mortgage payment with pride, as if to say they've made it in the world. And although they aren't paying rent to someone else's mortgage, many a first-time home buyer fails to see the other costs involved in the purchase.
Closing costs make up roughly 2-5% of the home's purchase price. For a starter home of about $150,000, that is $3,000 to $7,500 that is due when you close on the house. Those are costs that you can't always make up when you sell the house to someone else.
Interest rates are climbing making it difficult for many people to even get a starter home. If you are one of the few who are willing to jump in and take on the interest rates, know that the first few years of your 30-year fixed mortgage, you'll be making payments largely to your interest, not the actual value of the house.
Maintenance and Renovations
Many people buy a starter home and get to work renovating the place. While this makes the home a nice place to live, many people fail to take into account what it is costing them. Most people buy a starter home for a few years before they purchase their family home (aka "forever home"). By sinking costs into a house that you are planning to sell in a few years, you'll often end up spending more money than you would by simply renting a home.
Your property taxes are due annually and are figured based on the value of your home. This is another couple of thousand dollars that you can chalk up to owning a home.
Capital Gains Tax
If you live in the home for less than two years, you could end up paying a capital gains tax. That's because it's considered an investment property rather than your actual living space. If you plan on buying a starter home, plan to live in it at least five to seven years to truly get your value out of it.
Pros of Getting a Starter Home
The purpose of this post is not to bash starter homes, though. There are many great benefits to getting a starter home that make buying one a great investment. In fact, calling it a "starter home" may actually be a bit insulting, especially if the buyers only plan on starting out in it to move to bigger and better things—starter home included.
Med School Starter
If you're planning on going to graduate, law, or med school, a starter home may be just the thing for you. Rather than living in big urban areas like New York City or San Francisco, you can buy a smaller home in the suburbs to live in while you're in school and rent it out or sell it to other students when you leave. This is a good idea since you know you'll be in the area for at least three to six years of school, and you can live in a roomier location (with your family, if applicable) without nosy neighbors and loud student parties that might distract you from studying.
Many people buy a starter home as their introduction to real estate investing. This is a smart idea all around because they can live in it while they fix it up and rent out a portion of it meanwhile. Then, when they're ready to move on, they can rent it out. Small single-family homes perform well on the market and do well for investing since you typically have family renters with more stable jobs than multi-family homes.
If you live in a smaller city and are planning on staying there for at least five years, a starter home may save you money. Aside from the tax deductions, hopefully your house will have gained enough equity over those years for you to sell for a small profit.
Buying a Starter Home
If you've chosen to buy a starter home, make sure you know your budget and stick to it. As you house hunt, you're sure to run into many extravagant homes that you'll want or want to replicate. Remember—this is your beginner home. It doesn't need to be the best of the best yet.
One way to make sure you look within your price range is to get a great real estate agent. They'll help you find a house that has good bones and a good price that will fit your needs for the next several years.
If you're looking to buy a starter home for investment purposes later, look at it strictly as an investment property. Look into the ROI, the neighborhood, and the rentability in that area. Make sure you're getting the best bang for your buck, even if it means sitting on a house for a bit negotiating a price drop.
If you're planning on selling in a few years, cut back on your expenses by looking for a starter home that doesn't need many large repairs. You don't want to dump money into a new HVAC system or a large remodel only to have it not reflected in your sale price later.
‧ ‧ ‧ ‧ ‧
Start your house hunt off on the right foot with one of the best real estate agents in your area. Clever Partner Agents come highly recommended by those in your community, which means they'll take care of you, too. Call us today at 1-833-2-CLEVER or fill out our online form to start.