What To Look For In A Starter Home

If you've been thinking about taking the plunge into homeownership, the term "Starter Home" may have popped up here and there, and for good reason. Starter homes are a smart choice for the first-time homebuyer for their affordability, flexibility, and potential return on investment. With mortgage rates still at the lowest levels in some time, potential buyers should read on to learn about the benefits of these types of homes.

Starter Home vs. Forever Home - is there a difference?

Starter homes tend to be more affordable homes that a first-time buyer can easily qualify to purchase with the intent to grow out of. These can be anything from a townhome, condo, or single-family home with smaller, more modest accommodations serving the basic needs of the would-be homeowner and fall within the lower end of the price range in that local real estate market. These homes are typically not your "Dream Home" but serve all your immediate needs for the foreseeable future.

In contrast, a "Forever Home" or "Move-Up Home" might be big, small, cheap, or expensive - but checks all the boxes you have for a home that will meet your needs for many years - possibly forever! These homes don't have a set standard and can vary widely based on your particular needs and vision. Fixer-uppers, homes with land, new construction, etc. all fit into the forever home category if they provide the room and potential for a place to plant roots and grow.

What are the Benefits of Starter Homes?

Even though demand for starter homes tends to be higher and prices do fluctuate - they still tend to be at entry-level price points. The goal here is to get out of the cycle of paying rent and begin building equity.

Another benefit of smaller homes is that the equity can appreciate much faster than larger, more expensive homes. Consider the fact that smaller, lower-priced homes come with a lower monthly mortgage payment, lower maintenance costs, and lower utility bills since it takes less heat, air conditioning, electricity, etc. to run the home. Your property taxes could be less as well if they're based on the sales price and getting pre-approval as a first-time homebuyer may be easier as well.

What are the Drawbacks of a Starter Home?

While starter homes come with lower price tags and lower costs for their upkeep, there are still some drawbacks to consider. For the starter home buyer, you're typically not planning to settle in for an extended period so there are some limitations you should be aware of.

Building lasting relationships or becoming an integral part of your community can be difficult unless your next home is in the same area. If you have kids or plan to start a family, it will be hard for them to create strong friendships with neighbors or classmates if a move is in the near future.

While the home is yours to do what you like with, it may not make financial sense to invest in a ton of renovations or upgrades to a home you may not live in for long so customizations will be limited. Other limitations could include less space and purchases like appliances that may not fit in your next home. Finances could also be tight as you save for a downpayment and moving expenses for your forever home.

What Should I Look for In My Starter Home?

First-time homebuyers who are interested in the purchase of a starter home should be committed to a practical approach to their home search as opposed to an emotional one. As mentioned before, starter homes are small, affordable places to live in the short-term so being able to differentiate between what your "Needs" are in the short term compared to what your "Wants" are for the long term will be crucial in finding a great starter home.

But even though it may feel like a starter home comes with a lot of compromises, it's important to know that you should make decisions based on what works best for you. Let's take a look at some considerations you can make to make the best choice:

Convenient Location

Although it may be a home you live in for a short period while building equity and financial stability for your dream house purchase, location still factors into your decision. Not only does looking for a place that's near the people, work, and activities you're involved in ensure you're happy where you end up - it also helps you narrow down your choices. Consider your commute time to the places you'll frequent, especially your place of work. If you're working from home as a lot of people are these days, consider your proximity to family and friends. If it’s more important to you that your starter home has certain features available, I find this is an area you may need to be flexible in as those looking for a starter home sometimes need to compromise on location to get what they are looking for.

Maintenance

While starter homes will tend to be less expensive, smaller homes that cost less to maintain, I still recommend that you look for a home that's one of the better-maintained properties to avoid costly repairs down the road that might negate your efforts of saving.

When the simple routine upkeep of a home can be costly, your best bet is to look for a home without the need for significant repairs or fixer-uppers. Minor repairs are one thing, but if you're considering a home that has structural issues or is going to need considerable repairs, it may be best to move on to another option.

Good Housing Market

Since starter homes will tend to be homes you stay in for shorter periods, it's important to research neighborhoods where home prices have remained steady or have increased over time. Even though the plan may be a shorter-term stay, you should still think long-term in regards to the home's value. Remember, you want to be able to sell this home for a profit if possible and also recoup the 2-5% in closing costs you paid when you bought. 

By choosing a great real estate agent, they should be able to advise you on areas that are seeing good values and also on the current housing market. In a seller's market when multiple offers are on the table, you'll want to know how to make the best offer on a home and avoid a bidding war that can price you out of your budget.

Lifestyle

It's easy for the emotions and excitement of buying your first home to creep into the decision-making process. Looking at homes with hardwood floors, stainless steel appliances, that extra bedroom or two-car garage can begin to tug at your senses. But keep in mind two things when considering the homes you're viewing: your goal with a starter home is to find an affordable home for the short-term, and while you should take into consideration your lifestyle - make sure it's your "Starter Home" lifestyle and not your "Forever Home" lifestyle.

That being said, you should consider family, friends, work, and entertainment as mentioned when I talked about location. But here it still holds true, think more about these things than how many features the home has so you can keep your costs down to reach your home buying goals.

How Long Should I Plan to Live in My Starter Home?

My advice is to plan on living in your starter home for at least two to three years before considering your next move and ideally around 5 years. There are a few reasons for this:

You want time to build equity in your home and it may be difficult to do so in under two years depending on how aggressively you're paying off your mortgage. Selling too soon could result in only breaking even or even losing money after the fees and expenses involved.

Additionally, selling your home with less than two years of ownership could make you subject to capital gains taxes. Take advantage of tax savings from any profit you earn and avoid this by planning on a 3-5 year stay.

Final Thoughts on Starter Homes

As we've seen above, there are several factors to consider when looking for a starter home. The most important thing to remember is that a starter home is meant to be a short-term place to live until you've outgrown the space or are financially prepared to purchase your forever home. So when you're deciding which house to buy, ask yourself what kind of life you want to lead. Are you looking for a home that will allow you to save for retirement, a family, a bigger house? Or are you looking for a home that allows you to enjoy life now?

If you want to learn more about the top homebuyer questions I'm asked or about starter homes please get in touch!