The notion of twentysomethings or newlyweds buying a small two-bedroom home that they fill with cast-off furniture might be going the way of wall-to-wall shag carpet.
And it’s not because of the persistent myth that millennials are all holed up in their parents’ basements. In fact, millennials have been the largest share of home buyers for the past five years, making up 36% of purchases, according to the National Association of REALTORS®.
But an interesting trend has emerged: They are increasingly skipping the traditional “starter home,” and instead immediately trading up to a “forever home.” An analysis of Census Bureau data by Ralph McLaughlin, chief economist of Veritas Urbis Economics, found that from 2012 – 2016, nearly a third of buyers age 33 – 37 bought four-bedroom homes, compared to fewer than a quarter in that age group in 1980, 1990 and 2000.
But is that a good idea? Here are some pros and cons for each type of first home.
Pros Of The Traditional Starter Home
Since a traditional starter home is a bit smaller, they tend to be more affordable.
“Starter homes are often within the perfect price range for millennials, allowing them to get out of their parents’ home and into a place of their own,” says Doug Keller with Eddy Homes in Pittsburgh.
A starter home lets you “try out” homeownership, in a sense.
If you’re used to a landlord handling repairs and doing your monthly landscaping, all the house maintenance chores could be a rude awakening – and the bigger the house, the more upkeep required. If cleaning one bathroom feels like an imposition, you may think twice about upgrading to four.
Another pro? It can eventually become an investment.
A starter home can be an important jump start to your eventual wealth accumulation if you hold onto it and rent it out as another form of cash flow when it comes time to make the move to a forever home, notes Keller. “The money brought in can help finance the new home, while also allowing for tax deductions for expenses required to maintain and manage the rental.”
Cons Of The Traditional Starter Home
Hard to Sell
Oftentimes a starter home is located in an area that is on its way down, or that didn’t “up and come” as you had hoped for.
“There are a number of variables that determine a home’s worth, as well as the overall desirability of a house. As a result, it’s important to do plenty of research ahead of time to ensure you can eventually get the resale value you hope for,” Keller says.
A sometimes overlooked con of starter homes is the potential number of repairs.
“’Starter home’ is often synonymous with ’fixer-upper,’” notes Keller, which means you may be facing a host of troublesome and potentially expensive repairs.
Pros Of The Forever Home
You Might Be Ready
Since millennials do tend to move out later than previous generations, they have likely been socking away their money, rather than squandering it on avocado toast as media hype might have you believe. This means they might well have adequate savings to afford a down payment and be ready to invest in the home of their dreams.
One major pro of a long-term home is that it has the amenities you want now.
Why put up with a drafty basement or a tiny galley kitchen if you don’t have to? Many of today’s millennials have been raised visiting fancy resorts and living in upscale dorms. So if you’ve been taking cooking lessons for three years, you know the value of a gourmet kitchen. If you’ve been watching HGTV for a decade, you probably have loftier visions of what you need in your own home.
Worth The Price Tag (Maybe)
The reality is, your forever home might not cost that much more than a starter home, if you look at it all-in.
Remember the fixer-upper starter home? Instead of investing $10,000 in a new roof, you can sink it right into the mortgage payment of a home with a roof that’s good to go.
A longer-term home could increase in value more than a starter home, which is important if you’re looking at home buying as an investment.
Over time a house typically will increase in value, and there can be a significant multiplier in forever homes, Keller says, often because they are located in established neighborhoods.
“This is particularly advantageous for young people who can remain in forever homes long enough to receive the maximum bang for their buck when reselling,” he says.
Cons Of A Forever Home
The initial cost of a forever home is the largest barrier to purchase, but there is also more upkeep required, from maintenance to higher utility bills.
Make sure you factor in a reasonable amount for monthly costs so you don’t find yourself house poor. “Ask yourself whether the monthly payments and ancillary expenses related to your forever home restrict you from having the lifestyle you want,” suggests Sean McConnell of Compass Real Estate in Seattle.
Have you thought about what happens if you don’t live there forever, after all?
We all know about the “best-laid plans.” And often when you’re just starting your career or are just beginning a family, you might not be as settled as you think. You may have more kids or fewer kids. You may switch careers. You may be transferred. “You don’t want to be locked into an expensive monthly payment or feel like it’s too hard to move even for a great opportunity,” McConnell says.
You might not even know what you like. For example, you might not have thought through whether you need the master on the main floor or upstairs with the kids. Or whether that busy street will drive you nuts – and mean your kids will never learn to ride a bike.
The best way to know if a starter home or a forever home is right for you? Start by running your numbers and then talk to a real estate agent. The home of your dreams is out there, even if it’s not the home of your dreams forever.