Why Buying Too Small of a House Could Cost You in the End

Read this before you buy a house to make sure you don't make a mistake.

Many finance experts warn against buying a house that's too big. And there's a good reason for that. A large house can come with huge utility bills, a large mortgage payment, and a big property tax bill. You'll also have to buy more furniture to fill it up and spend more time cleaning it.

But while purchasing a property that's oversized has big downsides, you could also end up regretting buying one that's too small. In fact, purchasing a property that's undersized could cost you money in several important ways. Here's how that could happen. 

1. You might have to move sooner than planned

If your house is too small for your family and your lifestyle, you may discover that living there for the long term simply is not possible. This is especially true if you end up expanding your family and need more bedroom space.

If it turns out you can't live comfortably in the house, you might have to move sooner than you had hoped. Since there are huge transaction costs associated with buying and selling real estate, you could lose money if you have to move after a short period of time. And, even if you sell at a profit, if you haven't lived there for at least two years, you could get hit with capital gains taxes that you might have avoided with a longer ownership period. 

2. You may have to pay for a costly addition 

If you can't or don't want to move and it turns out your house is too small, you may need to put an addition on the property. This can cost a lot by the time you factor in permitting fees and building expenses at a time when supplies are at a premium price.

If you have to borrow for the addition, you'll likely also pay a higher interest rate than you would have if you had just bought a slightly bigger house with a slightly larger mortgage from the start. A primary mortgage will have a lower rate than a second mortgage or a personal loan used to pay for home upgrades. 

3. You may have to pay for outside storage

If you cannot find room in your home for all of your stuff, you may have to pay for a storage facility. This can cost you a few hundred dollars per month and, unlike mortgage payments, the payments you're making to storage aren't going to help you build equity. A slightly larger mortgage payment for a slightly bigger house would have been a better investment than paying for storage, especially if you itemize on your taxes and deduct mortgage interest. 

4. You may not be able to do key tasks at home

If your home is too small, you may be forced to do more things outside of your home, which have to be paid for. For example, if you don't have office space to work from home, you might have to pay to go to a cafe or shared working space. Or if you don't have a guest room, visiting loved ones might have to pay for hotel rooms. 

It's important to take these downsides into account when deciding what size property makes sense. Ideally, you'll find a home that's neither too big nor too small, but just the right size to meet your needs.