Buying a Starter Home

If you believed everything on cable TV shows about real estate, you'd never believe that a first-time homebuyer is typically better off buying a starter home over any other kind of home. Starter homes don't always offer all of the pizazz that you find in more expensive homes, so the notion of buying a starter home may not sound very glamorous to some. But there are some good reasons to buy a starter home vs. a forever home.

First-time home buyers generally start out house hunting by putting together a list of amenities and nailing down a few locations where they want to look. A standard choice for a starter home in the suburbs is often one with three bedrooms and two bathrooms. A standard choice for a starter home in a high-cost urban area might have two bedrooms and one bathroom, or it might even be a studio condo.

Learn more about the benefits of starter homes as well as tips for buying one.

Benefits of a Starter Home

Strong Demand for Starter Homes

Whatever type of home a buyer chooses as a starter home, that home is generally priced at an entry-level price point. The good thing about buying an entry-level home as a starter home is the fact the demand for entry-level homes tends to remain constant.

There is almost always upward pressure on prices for entry-level homes, because that's the biggest market for newer home buyers. People will not necessarily need to buy a spacious two-story with five bedrooms, but almost everybody—at some point in life—needs an entry-level home.

Faster Appreciation

A starter home will probably better protect your investment and will most likely appreciate much more rapidly than a move-up home. Many people recall the market crash of 2008 and the resulting downfall of the real estate market, which caused home values to decline by 8.4% by the end of the year. When home sales rebounded in 2012, it was the starter homes that emerged first from underwater status.

Lower Expenses

It's not just your mortgage payment that will be lower because the sales price is less. Your property taxes—if based on the sale price—will be more manageable, too, as will other expenses that you might not consider, such as gas and electricity. It costs much less to heat or air condition a two-bedroom home than a one that is twice that size.

Three Tips for Buying a Starter Home

1. Don't Get Carried Away

Start out by affirming that you want to live below your means, and you won't end up spending more than you can afford. Most starter homes are purchased by first-time homebuyers on an emotional level. It's easy to fall in love with a home. However, when you're spending your first tens or hundreds of thousands of dollars, you want to do it based on logic and common sense. Don't get carried away by amenities you see in more expensive homes—those things are probably not as expensive to add as you might think.

2. Line Up Your Financing

Use a pre-approval letter from a recognized mortgage lender in your town. You might be tempted to go online to find a good rate, but any lender in your town can offer competitive options. You would be wise to try to keep money in your local community and to support your local businesses.

3. Be Willing to Bend

You might not find the perfect home, but if you do, you will know it immediately when you see it. However, some buyers do not find that "perfect" home, particularly during times of limited inventory. In that event, be willing to give up one of your priorities, such as a garage. You can always build a garage, add a deck, and beautify your landscaping.

Of course, remember the adage "location, location, location." It's repeated three times by real estate agents because it's one of the most important things you need to know. You can do everything else wrong, but if you buy in the right location and are patient, you'll make out OK.