"Starter homes?"

[AgaBoogaBoo]

I hear people talking about starter homes here and was curious if this is a common practice.

In my mind, a home was something you purchased when you know you want to live somewhere for as long as possible, and you didn't really plan on moving out. A starter home has the intention of being left at some point for a better home.

I never even see a home as an investment, because putting all that money into a single investment "fund" is probably risky... I see a home as something you get with the thought that you'll be there for a while and at some point, won't have to make monthly loan payments on it.

Anyway, my question is why people get starter homes and if it's financially wise or not. Maybe it is if you're in it long enough? The fees/time/effort/etc. to purchase it, sell it, etc. probably take a year or two to recoup in itself.

 

[zinfamous]

If you don't see a home as an investment, then it's probably best that you don't buy one.

 

[AmpedSilence]

starter homes were probably more popular during the boom. You buy a house for a year or two, then leave for a bigger better house. Rinse. Repeat. Then bubble bursts. Then you go back to your starter home and then it just becomes a home.

 

[Patt]

Definitely an investment ... I bought my shack 4 years ago for $100,000, and have it listed, with several interested parties (no offers yet though) at $275,000. We probably put in about $30,000 into the place, but that is still a pretty great return!

 

[Anubis]

"starter homes" are things new couples buy or single people, generally they are smaller/cheaper, when they want to start a family they normally look to get something bigger

 

[AgaBoogaBoo]

Originally posted by: zinfamous
If you don't see a home as an investment, then it's probably best that you don't buy one.

Maybe it's our terminology then? I think of an investment as something to grow your money with. A home is a place you live, what does it matter if the value goes up or down? My thought is that if you purchase a home with the idea of living in it no matter what happens to the external (market) value, you will have less to worry about.

Basically, I'm asking why a home should be purchased as an investment and not simply as a place to live. If people had done this in California, even if the value drops, what does it matter? Their home is their home and if they didn't get an ARM, nothing will change except what people say about their home.

 

[AgaBoogaBoo]

Originally posted by: AmpedSilence
starter homes were probably more popular during the boom. You buy a house for a year or two, then leave for a bigger better house. Rinse. Repeat. Then bubble bursts. Then you go back to your starter home and then it just becomes a home.

When you only have a single home though, you're betting all your debt on the boom continuing though, right? That's pretty risky IMO, especially if you're not in the business of doing that regularly.

 

[dullard]

The average length of time a person stays in the first home is 5 years. So, that means several things:

1) You don't have to save so much for that dream home. You can get a home now, and keep saving while you have the home. Get your dream house for your second house as statistics show you will likely stay there longer.

2) You don't have to fork over tons of money to get everything you want because you likely won't stay there for long.

3) Once you get there, don't put too much money into it. You will likely leave soon, and you rarely get your full money back for the improvements.

Homes are investments, but they are usually poor investments. Get a home if it will make your life better. That usually means getting a home now even if you can't afford your dream home. No problem, because you probably won't be in your "starter home" for long.

A rule-of-thumb is that it is better to get a home if you are there at least 3 years, and often you need 5 years to break even financially. But don't forget about the intangible rewards can outweigh the costs of being in a house for shorter periods of time (no noisy neighbors keeping you up when you seriously need sleep and with their cancer causing smoke filtering into your apartment).

 

[Capt Caveman]

For some, buying a home is cheaper than paying rent. However, due to the location, school system etc, it may not be ideal when you have kids.

 

[Xavier434]

For me, when I say I want to buy a starter home, I mean I want to buy a home that I plan to live in for a long time and improve upon instead of buying a home that already comes equipped with most of things I want such as a modern kitchen. However, as time goes on and the value increases, I will probably sell it eventually and purchase the home that I will spend the rest of my days in....or until my kids put me in that other "home".

Most likely, I will not sell my starter home for a bare minimum of 10 years. More realistically, I will be there for 15-20 years.

 

[Descartes]

I usually look at a starter home more as one that needs work, one that might not have everything you want one that might not be what you can withstand for years (not accommodating to children perhaps), etc.

The wife and I decided to buy a house because we planned on being in the same location for 3-5 years. For us, it's not so much as being an optimal investment as it is being more optimal than renting and putting any excess into other investments. We bought the house full knowing that it wouldn't be our last home.

 

[kranky]

The concept of "starter homes" made sense when home prices were reliably rising 3% a year. You would buy a home with as small a down payment as you could get away with, live there a few years, your home value would rise, you would earn more money at your job, and then you move to a nicer/bigger house using your profit on the starter home plus you can now afford a bigger payment with your higher salary. Yes, there are costs involved with buying/selling and those must be factored in.

A home is not an investment, it's a place to live. Like anything else, you evaluate whether it is more cost-effective to buy or rent, factor in your personal preferences (if you buy, you can do whatever you want with your place... if you rent, you have no maintenance costs... etc.) and do what is best. You can make a profit with a home, which is great, but that doesn't make it an investment.

You'd be surprised, but few people seem to even imagine NOT having a mortgage payment. If they don't have their home paid for when they retire, they'll just move if they can't afford the payments.

 

[Demon-Xanth]

The concept of a starter home was a place for someone that had no equity, such as a first time home buyer. They were typically smaller tract homes or fixer uppers. However, these days (atleast in my area) there really is no such thing anymore.

 

[ElFenix]

'house'

 

[rivan]

Originally posted by: AgaBoogaBoo
I hear people talking about starter homes here and was curious if this is a common practice.

In my mind, a home was something you purchased when you know you want to live somewhere for as long as possible, and you didn't really plan on moving out. A starter home has the intention of being left at some point for a better home.

I never even see a home as an investment, because putting all that money into a single investment "fund" is probably risky... I see a home as something you get with the thought that you'll be there for a while and at some point, won't have to make monthly loan payments on it.

Anyway, my question is why people get starter homes and if it's financially wise or not. Maybe it is if you're in it long enough? The fees/time/effort/etc. to purchase it, sell it, etc. probably take a year or two to recoup in itself.

Starter homes are an excellent idea. Personally, I bought my first home with the intent of owning it until I got married and had a family - I didn't want or need a 3-4-bedroom home then, I needed something inexpensive. Best investment I've ever had, by far.

I had that duplex for 8 years. When I moved in rent was covering about 60% of the mortgage (the remainder was cheaper than a smallish apartment). When I sold, I was renting both sides, making ~$400/month after mortgage, maintenance and taxes related to that income. The sale price was just shy of 3x the purchase price.

Over the same 8 years, my 401(k) performed horribly, with a couple wipeout years making my performance over the period less than 2%.

SO yeah, homes can and often are an excellent investment.

Buying a starter home is an excellent way to work your way into some equity or better credit. Most people, without equity or help, couldn't easily afford a $250,000 house in their 20s, and rent is money that NEVER comes back. You *could* lose money on a house, but it's much more likely, especially buying right now with prices low, that you'll make a killing if you're sticking around for as little as 5 years.

 

[sactoking]

Originally posted by: Demon-Xanth
The concept of a starter home was a place for someone that had no equity, such as a first time home buyer. They were typically smaller tract homes or fixer uppers. However, these days (atleast in my area) there really is no such thing anymore.

I concur. A starter home is one you can get into without needing $100,000 cash for a down payment. If your median family has 4.3 people and the income is maybe $50,000, you either have to be EXTREMELY frugal or go the 'starter home' route to build up enough money to transfer into a nice 3 bedroom place.

 

[Capt Caveman]

I'm on my fourth home and none of them were places that I would consider staying for a long time. My first home I sold after five years for twice the price I purchased it for and the last couple sold after 3 years, making a profit each time.

I like remodeling/renovating houses so to me they are investments. When I finally get married/have kids, then I'll probably look to settle down.

 

[rivan]

Originally posted by: dullard
The average length of time a person stays in the first home is 5 years. So, that means several things:

3) Once you get there, don't put too much money into it. You will likely leave soon, and you rarely get your full money back for the improvements.

Homes are investments, but they are usually poor investments.

I've had totally the opposite experiences. It might be that I got lucky, but both of those statements are completely the opposite of my experiences.

 

[Special K]

I ran the numbers on this very detailed NYT rent vs. buy calculator:

link

and basically what I realized was that it will *never* make sense for me to buy a house from a financial perspective. I would need some reason other than financial gain to want to buy a house.

It makes sense when I think about it - right now, I pay ~$700/month for rent. There is absolutely no way I could find a mortgage with that monthly payment for any place worth living in around here, not to mention the cost of homeowner's insurance, repairs/maintenance, property taxes, and higher utility bills. If I were to continue to rent and invest the difference in index funds, I would come out far ahead financially than if I bought a house as an *investment*.

Then again, prices around here don't seem to go through large swings, so there probably won't be an opportunity to buy a house and see it appreciate 20% per year like some have done.

Like I said though, owning a house is about more than what will net you the most money in the long run.

 

[ShawnD1]

Originally posted by: zinfamous
If you don't see a home as an investment, then it's probably best that you don't buy one.

If people could get their heads out of their asses and stop trying to jump from house the house, the US wouldn't be in recession right now.

edit:
I do like the idea of a starter house. If you're single or married with no kids, a really small house can save a lot on rent. I wouldn't expect to make money with such a scheme, but not losing as much is still good.

 

[Xavier434]

Originally posted by: rivan

Originally posted by: dullard
The average length of time a person stays in the first home is 5 years. So, that means several things:

3) Once you get there, don't put too much money into it. You will likely leave soon, and you rarely get your full money back for the improvements.

Homes are investments, but they are usually poor investments.

I've had totally the opposite experiences. It might be that I got lucky, but both of those statements are completely the opposite of my experiences.

It completely depends on where you live and when you lived there. The bottom line is that different places during different times experience different rates of increasing/decreasing values for homes. A perfect example would be to look at Miami 10 years ago vs today. There are many homes in Miami that were purchased 10 years ago for as little as 75k that are now being bought and sold around 300-400k. I realize the bubble has not completely burst down there yet, but just to put it in perspective those same homes were selling for over 500k about a year ago so they have already gone down quite a bit. They will go down more but not that much more.

 

[Aquaman]

around here it's more like starter condo............ $300K+

Cheers,
Aquaman

 

[vi edit]

I've always assumed (and did this myself) that it was a reasonably priced home that you used as a springboard to a nicer place. It may be smaller or require some work, but it was a place to call home and didn't have a landloard breathing down your neck. You built up some equity, learned how to handle a house, and saved away some money until you started a family/grew your family and need/wanted something bigger.

It really comes down to location though. I bought my first house outside of Iowa City and they were really big on townhouses & zero lot line homes. Essentially two homes stuck together that shared a back yard and a middle wall with each other. These homes typically ran about 25% less than a stand alone place of the same size/ammenities. You could by one of these for $118k vs. $150k for a stand alone. They were great options for first time buyers.

But in many other areas you are seeing a complete gutting of "starters". If it's affordable, it's because it's in a questionable part of town with miserable school districts, or it's because it's a 40 mile drive and any savings you have are washed away now with fuel prices.

Plus in the last 8 years or so, there was very little interest in modest homes being built. It was all developments with homes that were "the next step up" for most people and they jumped right into them without going the starter route first. They went big an with fancy ammenities.

The "starter" home mentality has been erroded away by dirt cheap rates and the glamour mentality of flipping for easy money.

 

[ShawnD1]

Originally posted by: Aquaman
around here it's more like starter condo............ $300K+

In Edmonton, and probably a lot of other cities, a condo is as expensive as a house that is twice as big. On top of the mortgage, there's also a building fee, so the condo is actually more expensive.

The price is that high because people are willing to pay it, but why are people paying this much? It's like having a choice between eating a steak or eating dog shit, and choosing to eat the dog shit.

 

[dullard]

Originally posted by: rivan
I've had totally the opposite experiences. It might be that I got lucky, but both of those statements are completely the opposite of my experiences.

You are looking only at a one time housing boom and a rare but occasionally occuring stock market slide. These two events just happened to occur together (they are not independent events since people took money from the internet stock boom and put it into the housing boom).

I am looking at all of history of homes and stocks in the US. Over history, housing has typically returned nearly 3% on the investment while stocks have typically returned nearly 10%. And that 3% number doesn't include the massive maintenance required for a home vs minimal overhead costs for many stocks.

Remember, the housing market just lost 14% in the latest reports and is showing no signs of turning around. You got lucky. You bought just before the boom (at a housing bust in the late 1990s from the sound of your post) and it looks like you sold at the one massive peak that housing has ever had (mid 2000s from the sound of your post). That almost certainly won't happen again in your lifetime.

The one good thing about a home is that it is one of few legal investments where you can invest very little and buy a lot (buying on margin). That is great in times when housing is doing well. We saw that happen (lots of buying on margin) in the 1920s with the stock market. We all know what happened shortly later. Housing is extremely risky if bought with such high margins as most people do. So you have extremely risky, high maintanence fees, and a meager 3% return (just about even with inflation). Not a good investment. Yes, it is an investment, just not a good one historically. It would be very short-sighted to look at just the one housing boom, and to ingore history and the current housing bust.

I also take exception to your earlier comment that housing prices are now low. Yes, they are a bit off the peak, but they certainly aren't low. Everyone in this thread should take 4 minutes to watch this.