Many people buy a starter home and hope that in a few years they’ll earn more money and be able to buy a bigger house in a better location. Others purchase a house with the intention of renting it out or flipping it. While these strategies can make sense in certain situations, it’s important to work with a real estate professional to determine what makes the most sense for you.
Pros and Cons of Buying Now and Upgrading Later
Each time you buy a house, you need to pay closing costs. Depending on where you live and the price of your new home, closing costs could total several thousand dollars. This can become a hefty investment, as closing costs add up each time you purchase a new property.
Another issue to consider is how much of your mortgage’s principal you would pay off in the time you lived in the first house. Lenders charge more interest at the beginning of the repayment period, but as the loan is gradually paid down, more and more of each payment goes toward principal.
If you purchased a home and only stayed for a few years, most of your mortgage payments would go toward interest, and you wouldn’t make much of a dent in the principal. In some cases, renting and saving money to buy your dream home would make more financial sense. On the other hand, if you bought a relatively inexpensive house with low mortgage payments—or made extra payments along the way—buying a house you only planned to live in for a few years could be the better option. In the end, it all comes down to the specific house you’re considering, the amount of the mortgage, the interest rate, rental costs in the area and your financial circumstances.
Does Renting or Flipping Make Sense?
You might want to buy a house, live in the space for a few years and make some upgrades so that you can rent it out. In that scenario, you would need to find another place for your family to live, causing you to wind up with two mortgages. If you found a long-term tenant who consistently paid the rent on time, you could make a profit. However, if the house sat vacant for a while, you could struggle to handle both mortgages.
If you decided to buy a house, fix it up while you lived there and then flip it, you could earn a substantial profit, especially if you renovated the house yourself instead of paying contractors. The downsides to this approach are that you would need to deal with frustration, inconvenience and a mess. You could also encounter unexpected problems that could eat into your profits.
Do the Math
If you’re thinking about living in a home for a few years and then upgrading, you might be better off renting and saving for a down payment on a bigger home. Living in a house and fixing it up to rent or flip could lead to a profit or a financial disaster. Crunch the numbers and discuss your options with your real estate agent and lender to figure out what makes sense.