5 Reasons to Think Twice About Buying a Starter Home

It's a tough market for home buyers. The average home price in the United States was $417,700 at the end of last year, according to home price data gathered by The Motley Fool Ascent. And it's not just houses that are expensive, as mortgage rates are higher than they used to be, as well.

The solution some choose is a starter home. Instead of waiting for your dream home, you buy one that's smaller and more affordable. When you're ready, you sell it and upgrade.

It gets you out of renting and into the housing market. But if you're planning to shop for a starter home, there are several reasons you may want to reconsider.

1. You won't build much equity if you aren't there long

One of the arguments for buying a starter home is that you'll be trading in your rent payment to get a mortgage. You'll be building home equity, so you'll be able to make a profit when you're ready to sell and get your dream home.

Except you're not actually building much equity. During the early years of a mortgage, most of your payment goes toward the interest on the loan, not the principal. You pay much more toward paying loan costs than the home itself.

There's no guarantee that you'll make money when you sell your starter home, especially after fees. The less time you spend in your starter home, the more likely it is that you barely break even or potentially lose money.

2. Repairs and upgrades often cost more than they're worth

Home buyers are more willing to compromise on starter homes. It's not your forever home, after all, so it doesn't need to check all the boxes. And you can always do some remodeling. It costs more upfront, but it will also increase your home's value, so you'll eventually get your money back when you sell. Right?

Unfortunately, home remodels usually aren't the best investment. The 2023 Cost vs. Value Report by Remodeling compared the cost and increase in resale value for 23 remodeling projects across the United States. Only four out of 23 added more value than they cost on average.

Some of the most popular types of remodels are also some of the worst from a value perspective. For example, a major kitchen remodel at a midrange home costs an average of $77,939 nationwide. It only adds $32,574 in value.

3. It's easy to get stuck in your starter home

Before you buy a starter home, you'll probably expect to spend about five to seven years there. But life doesn't always go according to plan.

Finding a new home, buying it, and selling your old one are all a hassle. Moving is no picnic, either. When you think about everything that's involved, you might find yourself tempted to just spend another year in your starter home. And then another, and another.

You'll also form ties to the place where you live. Even if you move into a starter home, you could still become a part of the local community. Maybe you make friends there, and your kids start going to school nearby. It often ends up more difficult to leave a starter home than people originally expect.

4. You may end up buying furniture twice

Every time you move into a new home, you need to furnish it. You can certainly keep using the same furniture, but there's a good chance that you'll need to buy at least some new pieces. You may have more space to fill in your new home than your old one. And some of your current furniture may not match the style of your new place.

So, if you get a starter home, you'll most likely end up doing some furniture shopping for it. And you'll do it again if you later move into your dream home. This is worth taking into consideration when deciding if a starter home is a smart financial decision.

5. You could do better financially by renting, investing, and waiting for the home you really want

If you're eager to buy a home because you want to start building wealth, there is another way to do that. You could continue to rent and invest in stocks with the money you save (it's cheaper to rent than to own a home in most major cities). The stock market is one of the most proven ways to build wealth, as it has an average return of about 10% per year.

This is what I've personally done. I may buy a home in the future, but I only want to do it if I'm sure I'll stay long term. Because I've been renting and saving on homeownership costs, I've been able to invest a large portion of my income.

Think it through so you can make an informed decision

None of this is to say that a starter home is always a bad idea. It works for some people, but there are downsides and risks involved. It's best to consider those first so you don't make a decision you regret.