A Reddit user in the r/FirstTimeHomeBuyer forum asked a question that got a ton of replies: If the point of buying a starter home is to build equity and eventually upgrade to a dream home, what happens if both types of homes rise in price at the same time? Does that erase any financial advantage?
“However if the price of your starter home increases, wouldn’t the dream home do the same? In the end you’re really not gaining anything since the price increase happens both ways,” original poster wrote.
Their concern resonated with many others who have asked themselves the same thing.
A Matter of Leverage and Equity
While it may seem like a break-even situation, many pointed out that owning a home has advantages over renting.
“The equity increase in your starter home translates into a downpayment increase on your next home,” explained one person.
“Say you have $30k downpayment on your starter home. It increases in value and after you sell, you have $100k cash for your next downpayment.”
Another person broke it down in terms of market exposure: “Let’s say you’re able to afford a $400k house, but in reality, want to buy a $600k house long-term as your goal. So 5 years down the line, you could see the price of your target house double ($1.2 million), but your exposure means you also now own a $800k house that you can use to help afford the target house.”
Renting vs. Owning
A major theme in the discussion was how homeownership, even in a modest property, helps build wealth.
“Every month that you pay rent, you’re adding to your landlord’s net worth,” one user wrote.
“Every month that you make a mortgage payment, you’re adding to your own.”
Even if appreciation is equal across the board, the monthly mortgage builds equity that rent never could. “You also pay down the debt on the starter home at the same time your equity increases,” noted another.
Real-World Examples
One person described how they started with a small down payment on a modest home, then used the profit from selling it to buy a bigger home a couple of years later.
A few years after that, they upgraded again, each time using the money gained to make a larger down payment.
Others emphasized the risks. “We bought a starter home a few years ago and now we can’t find buyers for it, so we’re stuck in it. It’s becoming our forever home against our will.”
And for many, the concept of a “starter home” no longer holds up.
“Starter homes are real estate agents’ propaganda to trick you into buying a s*** house. A house is a house.”
An Outdated Concept?
Several commenters argued the starter-home-to-dream-home pipeline is based on outdated assumptions.
“Now that home prices have doubled or tripled, a lot of people are finding their increased property taxes, insurance rates and general inflation are eating up any increased earnings.”
“With the price of housing increasing rapidly… what used to be a starter home is now maybe in that price category of that upgraded home,” another explained. “Incomes are still in that starter home territory.”
Make It Make Sense for You
Ultimately, whether a starter home makes financial sense depends on personal circumstances.
“Buy a house that fits your needs. If your needs change significantly, and your house no longer serves you, buy another one,” one person advised.
And sometimes, as another put it, “You have to start somewhere. Buy what you can afford so you start building equity.”
Either way, the smart move is to focus on what works for your life and money situation right now. You don’t need to aim for a perfect home later if you can find something solid that meets your needs today.
A smaller home that fits your budget now can still give you stability and a chance to build equity. Over time, that equity can help you move up, or you might just find you’re happy staying put.