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My wife and I are looking for our first home. We live in a somewhat high-cost area of the Northeast, so most of the houses we see in our price range need a lot of work or are in bad school districts or neighborhoods. Many people have recommended that we just get a townhouse or condo (which would be easily affordable for us) as a "starter home" and then sell that house to get a single-family home in a few years.

This advice has never struck me as very good. It seems like advice that might have been more relevant in the housing bubble. Part of my problem with this is that townhouses seem to be really difficult to sell. When I look at townhouse listings in my area, I see lots for sale in each development. One development has twenty active listings. Other developments include a lot of units that people are offering as rentals. Single-family homes, on the other hand, sell within days or weeks.

Further, among my family and my friends, I know four people who bought townhouses: only one of them was actually able to sell the home and upgrade. Two of them bought townhouses when they were single; when they married, they were unable to sell either, so they have to live in one and rent the other out, even though they could afford a nicer single-family home on their combined incomes. Another tried to sell his townhouse after living in it for almost ten years; he ended up finding no buyers, so he still owns the home and has moved out and lets an elderly family member live there.

On top of that, the starter home strategy doesn't seem to pay a lot of attention to real estate commissions and other transaction costs on the sale of your starter home. To keep the numbers simple, let's say I buy a $300,000 townhouse. The real estate commission to sell that home is going to be between $15,000 and $18,000. So in order to actually save any money toward my goal home, I have to increase my equity in the house (through appreciation and mortgage payments) by MORE than that amount. Given that townhomes seem to be bad at appreciation, that means if I assume the worst (no appreciation at all), I need to live in the townhouse for four to six years just to break even. Now throw in the closing costs on the original purchase - in my area, that would total up to at least $5,000, which makes the situation even worse. Basically, it sounds like this will make it a lot more difficult to get a single-family home - the $20k - $23k in extra costs are just another barrier between me and the down payment on the single-family home I want - and that's all assuming I don't become one of the poor people who can't sell their townhouse at any price.

Am I wrong? What am I missing here?

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    Honestly, I don't think you are missing anything at all. Looks like you've done the research and considered the important factors. – ChrisInEdmonton Dec 15 '14 at 13:57
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    Yes. Buying a townhouse as a starter home is a bad idea (for most people). Actually, any starter home that you do not plan to live in for more than 5 years works out to be bad (real estate comissions, loan origination, maintenance costs). – ChuckCottrill Dec 15 '14 at 17:15
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    Most of the factors your pointing out would make buying any house, whether single family, townhouse, or condo, a bad idea. Bad school districts, bad owner/rental ratio, too many houses on the market, etc., would make any purchase a bad idea. – jadoti Dec 15 '14 at 20:40
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    "I need to live in the townhouse for four to six years just to break even." if you are thinking in that timeframe, I would not suggest you buy anything. General wisdom is 5 years. But I think 10 years is a lot more reasonable and accounts for possible housing market drops. Buy as low a price house as you can that you actually want to live in, possibly for the rest of your life. Your starter house could be your forever house. If nothing like that exists in your price range, keep saving money. – TechnicalEmployee Jun 10 '16 at 16:22
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Buying a starter home is not a bad idea if you have a stable job and plan to stay in the area for a long time. Owning a house that you can afford is a very good idea.

Purchasing a home that you do not want to live in long term is not a good idea. People who move frequently pay a lot in real estate commissions, as you've mentioned, but they also pay loan origination and title fees.

Mortgage interest is tax-deductible, and many people consider home ownership to be better than renting because of that fact alone. What they do not consider are costs of property taxes, HOA fees (common in condos and townhouses, but also possible in single family homes), and being tied to piece of real estate if the job market changes and they need to move.

The easy rule of thumb is to consider the ratio of total price to one year of rent. If you could purchase for $200k, but you would rent for $800 per month then the price to rent ratio is 20.83. Depending on the market most homes fall between 10 and 20. When the ratio is less than 10, then you would be at a great disadvantage renting instead of purchasing, when the ratio is greater than 20, you would be foolish to buy instead of rent unless there was some other compelling factor motivating the purchase.

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    Amen to the second paragraph. "Starter home" is a fallacy left over from when the market was overexpanding, before the crash. Buy a house when you want to live in a house and expect not to move again any time soon. I'll also point out that townhouse is often a flavor of condo, and condos can sometimes combine all the disadvantages of renting (insufficient noise isolation, having to conform to the condo association's rules) with all the disadvantages of owning (needing to do your own maint or pay someone to do it, etc). Know what you want/need/expect, do your homework, and run the numbers. – keshlam Dec 15 '14 at 17:20
  • Mortgage interest is tax-deductible in the U.S., but not in (most) other countries. For example, it's not deductible in Canada. OP is probably in the U.S., but it's not totally clear. – ChrisInEdmonton Dec 15 '14 at 21:17
  • Yeah, I guess I assumed the reference to "a somewhat high-cost area of the Northeast" placed the user in the US, but we should probably clarify and add the tag. – Nathan L Dec 15 '14 at 21:24
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I personally would not buy a townhouse. with the HOA / Association fees plus the taxes its almost more than usual house.

Buy a home with average taxes (8,500-10,500) depending on your budget -> good schools (kids) --> No flood zone.

depends what area exactly in northeast you are.

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    Hi Robert and welcome to the site. Thanks for the answer. I do think that you might expand this a bit to discuss general 'starter home' as a concept, as the question seems to be asking about more than just townhouse per se (which you cover). Thanks for posting and I hope to see you around other questions! – Joe Apr 30 '15 at 20:21
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You are forgetting the fact that many renters (low/middle income) are spending the same amount for an apartment ($1600.00 to $2000.00 per month) as they would a townhouse. Most of them cannot afford a single family residence and living in an apartment demolishes their ability to save for a house. As a renter I have experienced rental increases of $75.00 to $150.00 twice during a calendar year and having only 2 months to adjust my budget. Buying a Townhouse, selling or renting to family or friends may be the only way for them to bring in income and build some kind of equity.

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