Small homes aren't the stuff of dreams - but they make dreams come true...

Real Estate Agent with Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605

One of the interesting things I see in our current market is the young millennial generation still seems all to prone to renting rather than purchasing. With rents heading sky-high, they are literally throwing money out the window waiting for the day when they can afford their dream home. They don't seem to this day may never come unless they build some equity. The best way to build equity is with a small starter home.

In the New York area, that often means a small cooperative or condo. In many cases, they can save hundreds in rent a month since maintenance costs and taxes on such purchases are far less than monthly rent. In other places, it could mean a small house of around 1000 sf. 

In recent years, the "tiny house" movement has captured the imagination of many Americans. Now, I'm not suggesting that a family of five should live in a postage-stamp home of 400 sf., but by  scaling back on their dream house and purchasing what they can afford right now, many younger people would be positioning themselves to own their dream home a lot sooner than if they continue to wait. 

Without getting too much into the weeds, a small purchase will accomplish several things:

It will reduce monthly outlay...
Most rents in the southern end of Westchester (and other high-rent areas) have extremely high rents driven by high demand and a lack of supply. the monthly outlay on something like a small cooperative with an 80% loan is going to offer immediate financial relife. 

It will stabilize outlay and remove uncertainty...
Rents are rising and this is causing great disruption. Renters have to face the decision each year of whether to pay more or move. The rental market is very volatile. Many people who longed to live in New York City rushed in when the market went way down during the great recession. Their new lifestyle was short-lived. Within just a couple of years, a series of rental hikes pushed many of them right back out. 

Equity is built by paying down the loan...
When the mortgage is paid, a portion of it goes to amortization. As the loan gets paid down, equity builds and that money comes back to the owner when they sell the home. 

Appreciation also builds equity...
Even without appreciation, the above benefits far outweigh the financial benefits of renting. But homes tend to apprciate around 4-5% a year. This added value, if present, will add to the nest-egg being built by all of the other factors.

Further Reading: 

Entry-Level Homebuyers - It pays to own



Comments (14)

Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Ruthmarie, it is difficult to understand why our millenials are still throwing away money, and the tiny homes are intriguing to many of any age.

Jan 28, 2018 04:27 PM
Ruthmarie Hicks

Thank you Joan. It drives me NUTS!  Last year I had a young woman whose parents offered to pay the entire downpayment on a 1BR condo. She couldn't quite afford a 2BR and that killed the deal. She was worried about how she would manage if she got married and started a family! HUH???? You aren't even engaged, let alone married with children! She is still throwing away money on rent (far more than the outlay on a condo). 

Jan 28, 2018 05:16 PM
Silvia Dukes PA, Broker Associate, CRS, CIPS, SRES
Tropic Shores Realty - Ich spreche Deutsch! - Spring Hill, FL
Florida Waterfront and Country Club Living

Ruthmarie, you are right about starting out small and trading up in time. It's a proven method that works.

Jan 28, 2018 04:51 PM
Ruthmarie Hicks
Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605 - White Plains, NY

Hi Silvia, 

Yes, this method has been a staple for building wealth and has withstood the test of time. The rents keep rising, and they just won't get the message...Some of them will never be able to own becuase of the amount of money wasted on rent...

Jan 28, 2018 05:20 PM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

Small maybe, but for me tiny would be the death of me.  I need space, of course I have 4 pets.

Jan 28, 2018 08:50 PM
Ruthmarie Hicks

I hear you Tammy. I have two huskies and am facing a downsizing. Fortunately, both are senior dogs. The oldest one will be 14 in June. So they aren't that active. But it STILL is a blow to me to have to downsize. 

However, for younger people and people who really have no choice, it is better to own than to rent. It just is. 

Jan 28, 2018 09:51 PM
Erika Rae Albert, Austin Real Estate Expert
E-Rae Realty - Austin, TX
Exceeding Expectations in Every Transaction

I think many don't even realize that homeownership is an option.  Lots of people think you need 20% down, and don't even know about all the other options out there.

Jan 28, 2018 09:45 PM
Ruthmarie Hicks
Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605 - White Plains, NY

Hi Erika, 

As I said in another comment, that doesn't seem to be the reason in a lot of cases. I live in NY and the cost of living for people around here (20 miles north of Manhattan) is really beyond crazy. What seems to be happening is that the younger ones have set their bar of "must-haves" way too high. They aren't going to get there while paying $3k/month for a 1BR box.  Purchasing a small co-op would cut that outlay in HALF.

But they need to be willing to take baby steps and build equity. I've seen cases where the parents or a relative was willing to give them the downpayment, but they refused because what they could buy wasn't "big enough". Really? Seriously? Someone is literally GIVING you that leg up and you won't take it? Meanwhile their rent is increasing by double digits a year...WOW! 

Jan 28, 2018 09:59 PM
Ruthmarie Hicks
Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605 - White Plains, NY

Hi Edward, 

You missed the entire point of the post. The option of living in a larger space isn't there to begin with.

They are either living in a 750 sf box for about $2500/month ($30,000 a YEAR) or they buying the same thing and getting some control over their outlay. If they stay in their rental, they have forked out $150,000 in 5 years, and that's assuming that the rents don't rise. Worse, they are probably no further forward in affording their dream home because the rent is eating them alive. 

At least with ownership, you build a thing called EQUITY. You are paying down the loan with every monthly payment you make while (if you keep it REAL - and small) you are cutting your outlay by 1/3 to 1/2. In that same five year period, that can lead to the ability to buy something more spacious. 

So rent a small box and get nowhere or BUY a small box and get somewhere. Those are really the only options. 

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