5 Reasons Buying a Starter Home in 2024 May End Up Being a Waste of Money
Written by
Martin Dasko
Edited by
Levi Leidy
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With the median house sales price in America at $412,300 as of the second quarter of 2024, per Federal Reserve data, potential homeowners could consider purchasing a starter home to enter the real estate market. However, this may not always be the best financial move, as buying a starter home can come with significant expenses. While you may save money on the initial housing cost, you could easily be stuck with major repairs and other issues that you can’t avoid.
What are five reasons why you may not want to buy a starter home?
High Transaction Costs
“Buying and selling homes involve significant costs, like closing fees and agent commissions, which can erode any gains, especially if you move within a few years,” said Timothy Yang, a real estate expert and founder of Land Value.
Closing costs on a home can add up as they’re usually around 3%-5% of the loan amount. According to the most recent data from CoreLogic, the national average mortgage closing costs for a single-family home were $6,905 in 2021. If you plan on purchasing a starter home to live in for a short period, you would be paying the closing costs on a home multiple times and this could be fairly expensive.
Limited Appreciation
“Starter homes often have less potential for value growth, particularly in less desirable areas, which can limit your equity gain,” Yang said.
When you purchase a starter home, you’ll likely have to invest money in upgrading the space, especially if it wasn’t in the best condition when you got the keys. This means you’ll have to spend a lot of money upfront without any guarantees of getting it back when you attempt to flip the unit.
According to HomeGuide, gutting and remodeling a house could cost anywhere from $100,000 to $200,000. The website also found that remodeling a kitchen costs, on average, $10,000 to $50,000, and a bathroom renovation can cost between $5,000 and $25,000.
In the 2023 Cost vs. Value Report from Remodeling, the study found that only four out of 23 projects added more value than they cost. A midrange major kitchen remodeling project cost an average of $77,939, but it only added $32,574 in value. While you may feel that the home upgrades are worth it, potential homebuyers may not agree.
If your starter home is in a less desirable community then all of the investments in upgrades could be difficult to recover when you struggle to sell the place in the future.
Maintenance Costs
Yang mentioned how older or smaller homes may require more upkeep, leading to unexpected expenses that strain a budget. For example, according to Angi, the average roof replacement cost is $9,433, which is just one expense you must consider with a starter home.
Even if you get a thorough home inspection done on the starter property, there are certain upgrades and repairs that you can’t avoid as a home gets older. This is money that you have to spend on top of the closing costs and other initial investments.
Outgrowing the Space
Another major issue with a starter home is that you can outgrow it quickly and want to expand your space. The home you purchased with your partner may not be enough when you add a pet and some children.
Yang added, “As your needs change, a starter home may become too small, forcing an early move and additional costs.”
In addition to dealing with real estate transaction costs again, this also means that you may have to purchase furniture twice because if you move into a larger space, you’ll need different couches and other items to fit the new home. As tempting as it could be to want to enter the real estate market with a smaller home, you may want to continue saving and investing until you have the funds to purchase a bigger space.
Opportunity Cost
Yang pointed out that money tied up in a starter home could potentially yield higher returns if invested elsewhere, like in stocks or other investments. While you may feel like there’s money to be made in flipping a home or in upgrading a starter home to rent out, you’ll want to run the numbers to ensure that they make sense. When you factor in the real estate closing costs, initial repairs, basic maintenance and other upgrades that you have to make in your starter home, you could find that the finances just don’t make sense.
As always, we suggest you consult with a financial advisor to ensure you make the best decision for your situation. Just because rates are dropping or you feel like buying a home is the next logical step, it doesn’t mean that it makes sense from a financial perspective.
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