The term starter home describes a first home that a person buys—without the intention of keeping it forever. This concept is not as popular in the current market as it was for past generations, but it is still a good strategy for may buyers to build wealth and establish homeownership. Essentially, you start with a small home, build equity for a few years, and eventually use that equity to purchase a larger, more permanent home. There are many considerations to make throughout this process, and we have outlined a few strategies and alternatives below.
Why you may want to move to a second home
- You have a growing family—whether you need more space, or a better school district, having kids will definitely impact your choice.
- You or your spouse got a new job. If your office is now further away, it may make sense to relocate to a closer neighborhood, or if you had a significant salary increase, you may want to put that additional income toward a new residence.
- It’s a good buyers market in your area. Maybe it just feels like the right time to take advantage of increased inventory and reasonable interest rates.
Regardless of the reason, there are a few considerations you should have before making any hasty decisions.
Consider renovating your current house
If you like your neighborhood, but want more space—or different space—you may be better off adding to your current property than purchasing a new one.
For example: If you’re thinking of moving because of a growing family, ask yourself if you really need different space, or just more space. If your current home is in a good school district, a family-friendly neighborhood, and has a sizeable back yard, you may want to consider staying in the location, and building additional rooms.
Alternatively, if your property doesn’t have the space to build on additional rooms or if the neighborhood isn’t a place you want to raise a family, it may be a good idea to move.
And you don’t always need cash on hand to renovate. Once you have some equity built up in your property, you could have the option to refinance your mortgage and get cash out for upgrades. You can add a bedroom, open up your kitchen, or create a home office to suit your needs.
Finding a new space
If finding a new home is the right choice, there are a few challenges you’ll need to prepare for:
Timing the sale of your current home and purchase of your new home. It can be tricky trying to predict when your home will sell. If you start looking at new properties too soon, you may fall in love with a home and not have the money for a down payment while you wait for your current home to sell.
Many people consider renting in between homes to reduce stress of timing it out perfectly. In that case, you can focus on the sale, and only start looking when you know when, and at what price, your first home will sell. Alternatively, you can use certain types of home loans, like home equity loans, to use the equity in your current property to buy a new home before the first home sells. You should consult an experienced mortgage broker who can assist with your particular situation.
Choosing to keep your first home as an investment property. It may make sense to keep your starter home as an investment property instead of selling it. If you can find a tenant who wants to rent the property, you could make a passive income while living in your new home. This can be a great way to build wealth and keep multiple assets, however being a property manager is a lot of work! Make sure you’re ready to take on the responsibilities before you commit to this approach.