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I think the idea of buying a starter home is one of the worst moves you can make financially as a younger person. Buying a starter home will likely cost you way more money in the end as opposed to waiting until you’re ready for a more high quality home. Around 70% of your mortgage payments in the first 5 years will go towards interest costs on your loan, so you build up very little equity in a starter home by the time you’re ready to move. Then you end up spending a ton of money trying to fix the place up. And when you do decide to trade-up to a nicer place you end up paying closing costs and realtor fees. In the majority of cases it will prove to be a far better move to rent for a few more years and save enough money until you can afford a nicer house. At that point the pros far outweigh the cons because of the sense of community, place to call your own and the psychic income involved.
Sometimes a starter home is the last ship that sails before the market slowly pulls away from your income. Promotions don't occur yearly. Merit raises are traditionally 3% a year. I've seen home prices jump more than this. This is an epidemic in large cities where new grads go for jobs. The caveat is, to stay in their careers they've invested in, you have to be located at least reasonably near an urban center to advance to senior (better paying) roles.
Apartments, save for price-regulated ones, will always be market price. A mortgage is essentially a rent-lock contract for your monthly mortgage payment, provided you choose a fixed-rate product. You think rent doesn't include your landlord's property tax and insurance? Why would he or she rent to you if your payment didn't cover the bills?
I think more is to be said of WHERE you buy your first home. Don't buy in a suburb or exurb as your starter home. The second the market tanks, you're stuck with it - you've essentially bought what was only built during a boom. The goal is to narrow the gap between the ease of moving out at lease end and the difficulty of selling a house on a 60-day notice from your job.
I wouldn't rent for 10 years. 5 tops, and that's if I REALLY wasn't sure about my job prospects in that location. Save hard, save fast. Buy new construction if you can.
We lived in our starter home for 3 years and it was the best decision we ever made! We built it brand new, but it was small and we put all builder grade materials in it. Once moved in I realized it was much to small for our needs and growing family, plus the neighbor hood wasn't exactly what I was looking for either because there were very little young families. Well, 3 years later the market in that area skyrocketed and we sold with a $100k profit! We took that money and built our dream home in a fantastic area! Without building that first "starter" home, we wouldn't have been able to buy that dream home.
We lived in our starter home for 3 years and it was the best decision we ever made! We built it brand new, but it was small and we put all builder grade materials in it. Once moved in I realized it was much to small for our needs and growing family, plus the neighbor hood wasn't exactly what I was looking for either because there were very little young families. Well, 3 years later the market in that area skyrocketed and we sold with a $100k profit! We took that money and built our dream home in a fantastic area! Without building that first "starter" home, we wouldn't have been able to buy that dream home.
We bought a 3/2 brand new starter home in 1954, in the Silicon Valley at Cupertino CA for $13,750, $0 down V.A. loan with PITI $77 payment. Renting homes in less desirable area would cost at least $110 per month. Today those 60+ year old homes are reselling for $1,250,000.
Over the next 10 years we traded up 3 times, upgrading each time, ending up in Saratoga. Everyone was a $0 down V.A. as the loans were paid off when we sold. Those 4 homes gave us a nice financial nest egg.
I knew a huge number of young families, that bought starter homes, and all prospered doing it.
Sometimes a starter home is the last ship that sails before the market slowly pulls away from your income. Promotions don't occur yearly. Merit raises are traditionally 3% a year. I've seen home prices jump more than this. This is an epidemic in large cities where new grads go for jobs. The caveat is, to stay in their careers they've invested in, you have to be located at least reasonably near an urban center to advance to senior (better paying) roles.
Apartments, save for price-regulated ones, will always be market price. A mortgage is essentially a rent-lock contract for your monthly mortgage payment, provided you choose a fixed-rate product. You think rent doesn't include your landlord's property tax and insurance? Why would he or she rent to you if your payment didn't cover the bills?
I think more is to be said of WHERE you buy your first home. Don't buy in a suburb or exurb as your starter home. The second the market tanks, you're stuck with it - you've essentially bought what was only built during a boom. The goal is to narrow the gap between the ease of moving out at lease end and the difficulty of selling a house on a 60-day notice from your job.
I wouldn't rent for 10 years. 5 tops, and that's if I REALLY wasn't sure about my job prospects in that location. Save hard, save fast. Buy new construction if you can.
the first homes we all bought back in the 1970's were 30-35k in long island ..
well today those 30-35k mortgages are long paid off . only now taxes are 12-18k a year . when it comes to affordability , the fact that mortgage is paid won't leave enough money left over to cover a utility bill today .
so despite paid off homes many retirees are leaving long island and either relocating to cheaper areas or moving in to nyc and the boroughs . with high rise and apartment houses in the city , housing can be way way less then trying to support a single family home .
real estate taxes are lower in the city but we have a city income tax . but much of our retirement income is exempt from city and state taxes .
so the point is that having a house does not guarantee cheaper living . there are a load of other factors involved .
in fact someone with a 3 bedroom apartment who moves to a studio apartment or 1 bedroom in an apartment style house after the kids are out can see far better improved cash flow then someone still trying to support a big ole house ... especially if they have that money invested generating income offsetting the rent and flying the empty seats tax wise .
a homeowner couple may actually spend the full 24k a couple gets as a standard deduction on their mortgage interest , real estate taxes and other deductible items ... .
a renter couple may have very little in deductible items and they get money back from that 24k that they never spent in the first place .. that money can go right towards subsiding their rent ... so there are so many factors that are really never factored in to situations .
that is why these silly statements like renting is throwing money down the drain as broad one size fits all statements are false ... it may be true if you have very limited dollars to spend and it is either buy or rent with nothing to invest . but once you have choices it negates that statement as you have opportunities for your money that can be far far more lucrative after subtracting out rent ..
we also tend to buy far more house then we would rent so in most cases it is not an apples to apple comparison the way it would play out .
it is like our first property was a co-op we bought as an insider when we were renting . we got it half price because the building needed at least half the renters to buy so the conversion could happen .
so we bought for half and sold years later for many times what we paid .
but now we had a choice , we could invest and rent or plow that money in to buying a home . we actually did a bit of both . years later the house was sold , we had a nice chunk of money to invest and we rented and invested that money . we bought other commercial real estate in manhattan which was so lucrative it was life changing .
we eventually sold the real estate for the most part , retired , rent and that money easily pays for our retirement and generates lots of income for us to pay rent increases and live a nice life style .
so you can see , different times , different things pan out better when it comes to the choices you can have because your resources change .
Last edited by mathjak107; 01-26-2019 at 04:42 AM..
We bought a 3/2 brand new starter home in 1954, in the Silicon Valley at Cupertino CA for $13,750, $0 down V.A. loan with PITI $77 payment. Renting homes in less desirable area would cost at least $110 per month. Today those 60+ year old homes are reselling for $1,250,000.
Over the next 10 years we traded up 3 times, upgrading each time, ending up in Saratoga. Everyone was a $0 down V.A. as the loans were paid off when we sold. Those 4 homes gave us a nice financial nest egg.
I knew a huge number of young families, that bought starter homes, and all prospered doing it.
Dare I ask when's the last time you moved and what's your property tax?
Buying is always better than renting, except when it's better to rent.
Buying, whether it's a "starter home", a "raising our kids home" or a "rest of our lives" home is not just a numbers game.
There are a number of nonmathematical variables that apply:
1. Timing - current economic factors
2. location
3. Can/will the buyer invest the money elsewhere?
4. Is a move within a few years a likelihood?
5. Ability to save for repairs/maintenance?
6. How long will this home suit your needs?
The list goes on and on
The decision to buy/not buy, and when and what, is so much more complex than an equation. Each individual has a different list of pros/cons and there is no "one size fits all" category.
I dunno, when my grandmother bought a little 1200 sq. ft. house at age 67, in which she lived the rest of her life, was that a "starter house"? Was it a good or bad decision?
I think the whole idea that some houses are "starter houses" and others are "real houses" is ridiculous.
1970 buy $36K, 1978 sell $49K, Columbus OH
1978 buy $36K, 1979 sell $45K, Westmont (Chicago) IL
1979 buy $60K, 1984 sell $80K, Naperville (Chicago) IL
1984 buy $90K, 1994 sell $160K, Andover (Boston) MA 1994 buy $190K, 2002 sell $475K, North Reading (Boston) MA
2002 buy $210K, 2012 sell $290K, Mount Pleasant (Charleston) SC
2012 buy $135K and still there, Lexington (Columbia) SC
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