Is it better to buy a small house first or save for your dream home?
Buying property offers opportunities for financial growth and stability – but how do you start? Is it better to buy a small house first or save for your dream home?
The idea of buying property can seem out of reach, especially when your income is limited. The good news is that starting small can be a highly effective strategy. By investing in smaller properties first, you can gain valuable experience, reduce financial risks, and set yourself up for larger investments in the future.
There are many advantages to beginning your property investment journey by buying a small house first. This approach can lower the financial barrier to entering the property market, simplify property management, and provide faster returns on your investment.
Curious about how a property investor went from saving her first paychecks to owning her first of three apartments by age 23? In our latest podcast episode, Carla Schesser, an Atelier Wealth client, shares her journey and why it is better to buy a small house first.
Listen to the full episode to hear Carla’s pandemic-era investment strategies, enabling her to capitalise on multiple property units to eventually buy her dream family home.
The Advantages of Buying a Smaller Property First
Lower Entry Price
One of the most significant advantages of buying a small house first is the lower entry price. Smaller properties like an apartment or townhouse generally require a smaller initial deposit, making them more accessible to first-time buyers. The total loan amount needed is reduced, which can make financing more attainable if you are on a lower income.
For example, your larger dream home may require a deposit of $150,000, but a smaller house might only need $50,000. By starting small, you can enter the market sooner and begin building equity, which can then be leveraged for future investments.
Easier and Cheaper to Maintain
Maintaining property can be difficult, but smaller properties are often easier to handle. With less maintenance, and lower overall expenses, the demands on first-time home buyers are significantly reduced. Smaller properties typically involve less upkeep, both in terms of time and money. Maintaining a one-bedroom apartment is far simpler and less costly than a four-bedroom house with a large backyard.
You can gain experience in handling minor repairs, and understanding the day-to-day operations of running a small home which will be handy when you eventually move on to managing your larger dream property.
Faster Return on Investment (ROI)
Smaller properties can also offer you a faster return on investment (ROI) if rented out. A small apartment purchased for $450,000 might generate a weekly rental income of $700. After accounting for mortgage payments, rates, and maintenance, the net income might be around $200 per month.
A larger home costing $1,300,000 might only generate $1400 in weekly rental income, with a net income of $250 a month after expenses. The ROI on the smaller property, in this case, would be faster due to the lower initial investment and proportionally higher rental yield.
By starting with smaller properties, you can build a steady stream of income and use the equity to reinvest in additional properties. This approach allows you to grow your property portfolio gradually and sustainably, setting you up for larger investments in the future.
Increased Flexibility
Smaller properties offer a significant advantage in terms of flexibility, as smaller houses are generally easier to sell compared to larger homes. The lower price point makes them accessible to a broader range of potential buyers, including other younger first-timers or older people looking to downsize. This broader market can lead to a quicker sale and less time on the market when you do eventually find your dream home.
The process of upgrading from a smaller property to a larger one is often smoother and more manageable. As smaller properties build equity over time, you can use this equity as leverage for purchasing your larger dream home.
Build Confidence and Experience
Starting with a smaller property also provides an excellent opportunity for new investors to gain valuable experience without taking on overwhelming risk. Starting small enables you to understand property market trends and the process of buying property without taking on significant financial risk.
Practical Advice for First-Time Buyers with a Limited Income
Assess Your Financial Situation
The first step in any investment is to understand your financial position. Begin by evaluating your savings, income, and existing debt, as these will determine your ability to secure financing and the amount you can spend on a house.
Aim to save at least 20% of the property price to avoid paying lenders mortgage insurance (LMI). Ensure your income is stable and sufficient to cover mortgage payments, maintenance, and other expenses. Lenders will typically want to see a consistent income history over at least the last six months.
Set Realistic Goals
Setting realistic and achievable goals is crucial for your first property purchase. This involves breaking the process down into manageable steps.
Determine what you want to achieve with your first investment. Are you looking for a rental income, future resale value, or a combination of both?
Establish a timeline for saving your deposit. For instance, if you want $70,000 and can save $1500 a month, it will take you about four years to reach your goal.
Open a dedicated savings account and automate your savings transfers. In the meantime, learn about different real estate markets in your area.
Meet with a mortgage broker to understand your financing options and get pre-approved for your first mortgage.
Research the Market
Conducting thorough market research is essential to find affordable and promising areas for buying a small house first.
Look for neighbourhoods with growth potential. Consider factors such as employment rates, upcoming infrastructure projects, and community development plans.
Real estate websites and local real estate agents can provide insights into property prices and trends.
Attend open homes and auctions as this will give you a better understanding of what is available within your budget and what features are common in your target area.
Secure Financing
Securing the right financing is crucial for first-time buyers. Fixed-rate and variable-rate mortgages are common options. A fixed-rate mortgage offers stability, while an variable-rate mortgage might start with lower payments but can fluctuate.
Many states offer grants specifically for first-time buyers, often with lower interest rates, reduced LMI or deposit assistance.
Find the Right Property
Selecting the right property involves careful consideration of several factors.
Choose a location with good potential for appreciation and rental income. Proximity to amenities like supermarkets, public transport, and schools can be advantageous. A well-maintained small house can reduce your immediate expenses.
Long-Term Benefits and Growth Opportunities
Buying a small house as a starting point can give you significant opportunities for growth and financial success over the long term.
Starting with a smaller property allows you to build equity, which can be leveraged to invest in larger properties down the line. As you pay down your mortgage and your small property value appreciates, you accumulate equity. This equity can be used as a deposit for your next property, enabling you to scale your investments.
Starting small also gives you the experience and financial stability to diversify your property investments. Once you have a solid understanding of owning a property and the real estate market, you can expand your investments into different types of properties and locations.
With time, your initial investment in a smaller property can be a stepping stone to financial independence. By reinvesting the rental profits and equity from your properties, you can build a real estate portfolio that generates passive income.
How To Buy A Small House
Buying a small house first has many advantages, especially for first-time buyers with limited income. Smaller properties are more affordable, are easier to manage, and can provide faster returns on investment. By carefully assessing your financial situation, setting realistic goals, conducting thorough market research, securing the right financing, and managing your investment wisely, you can build a strong foundation for future growth.
If you’re considering entering the property market, don’t be discouraged by the idea of buying a small house first. Every successful investor began with that first step. By focusing on smaller properties, you can gain the confidence and experience and gain equity to eventually buy your dream home.
We’d love to hear about your own experiences or answer any questions you may have about how to buy a small house. Share your stories or seek further advice by reaching out to us directly. The best time to start your property investment journey is now – take that first step towards a secure financial future.
