Is "Buy the Smallest House in the Best Neighborhood" Good Advice?

By: , Contributor

Published on: Feb 07, 2020

Is it a good idea to be a small fish in a large pond?

If you're looking for a new home but you're on a budget, there are a few different approaches you can take in the course of your search. You can aim to find a nicer home in a run-of-the-mill neighborhood, or you can attempt to find an affordable, albeit smaller, home in a much nicer neighborhood.

Often, you'll hear that the latter is the best way to go -- that you're better off buying the smallest home in the nicest area because that way, your home's value will get pulled up by those of the homes surrounding it. You may have also heard that buying a smaller home in a nicer neighborhood is a good way to give yourself access to amenities you may not find elsewhere, like a highly rated school system.

But is this particular piece of advice still solid? Or is it misleading homebuyers left and right?

The downside of buying a small home in a more desirable locale

You'd think that buying a smaller home in a nicer area would be a smart move financially, but research shows that that may not be the case. A few years back, Quartz analyzed home values and found that the more affluent a given neighborhood is relative to its nearby metropolitan area, the worse the homes within its lowest 10% tend to perform.

Why do those lower-value homes fail to increase in worth? One reasonable explanation is that they're just not desirable. People who seek out nicer neighborhoods often want nicer homes. And often, they can afford nicer homes.

Imagine you set your eyes on a neighborhood where the average home value is $800,000. Meanwhile, you only have a $400,000 budget, so you find the one home you can buy at that price point to get into that zip code. Chances are, the typical buyer looking in that area won't want a $400,000 property; he or she will want the amenities and square footage of an $800,000 home, or somewhere in that money-related vicinity. And if there's no demand for your smaller home, it may not increase in value as fast as its pricier counterparts -- or at all.

The upside

But while buying the smallest home in a nicer area may not be the smartest move financially, it could be a wise move logistically. If you have a family, buying that cheaper home could help your kids get a solid public school education and help them grow up in an area with relatively low crime. There's value to that, even though it may not be measurable monetarily.

Another thing to consider is that if you buy the smallest house in a nice area when money is tight, there's always the potential to upgrade when your financial situation picks up. And that way, you'll already be used to the neighborhood and have a better sense of what you want.

Ultimately, buying the smallest house in the nicest neighborhood could go either way. Just don't expect to make a huge profit when you go to sell it.

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