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You might struggle to buy a starter home. Read on to see why.
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Many people are having a hard time buying a home this year. Not only has it gotten very expensive to sign a mortgage, but the real estate market has sorely lacked inventory for months.
In fact, as of the end of June, there was only a 3.1-month supply of available homes nationwide, according to the National Association of Realtors. It can commonly take up to a six-month supply for there to be enough available homes to fully meet buyer demand.
Meanwhile, it’s common for first-time home buyers to look at starter homes — properties that are on the smaller side and sometimes need updating. Starter homes tend to be more affordable than forever homes. And because of their size, they often entail less ongoing work and maintenance (though there can sometimes be a fair amount of work initially to get a starter home into better shape). But you might struggle to find a starter home today for one big reason.
When you’re competing with investors with loads of capital
Many home buyers need to turn to mortgage lenders for financing so they can purchase a home. But a lot of first-time buyers today are competing with investors for a limited supply of starter homes. And given that many investors have the resources to scoop up those homes by paying cash, it’s pretty clear that everyday buyers are in a tough spot.
A recent Redfin tweet pointed out that 37% of U.S. starter homes were purchased in cash in May, up from 35% a year earlier. Redfin then went on to say that “real estate investors are buying up a sizable chunk of today’s affordable homes.”
Why do investors want to own starter homes? It’s simple. They want to make money from them. And they can do so in a couple of ways.
For homes that need updates, investors can do a house flip and score a near-term profit. For starter properties that are already in decent shape, investors can turn them into rentals and secure a steady stream of ongoing income.
So why would investors focus on starter homes? The reason is that they’re commonly easier to flip than larger homes, and they’re also easier to rent.
In a given neighborhood, a starter home might be able to command a monthly rent of $1,000. A larger home might go for $2,000. But people who can afford that higher amount of rent may be more likely to be in a position to buy a home of their own. So investors tend to target starter homes because they’re more likely to enjoy a steady stream of paying tenants.
How to buy a starter home in today’s market
It may be more difficult to buy a starter home in today’s real estate market, but that doesn’t mean it can’t be done. First, find a real estate agent who has a reputation for moving quickly and being a savvy negotiator. That way, you may be more likely to find starter homes when they first hit the market so you can get an offer in before the competition mounts.
Next, make a list of your home’s must-haves, but try to be judicious. Having fewer requirements could make it more likely that you’ll find a home you deem suitable.
Also, be open to repairs. You might prefer a starter home that needs less work. But in some cases, extensive updates can deter investors because they commonly want to see quick profits. If you’re handy and can handle a series of updates over time, you may end up finding a starter property to call home.
Having to compete with investors for a limited supply of starter homes is aggravating. But with the right strategy, you can increase your chances of being successful.
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