In the fast-paced, competitive, and highly profitable world of real estate investing, starter homes are often a less enticing–and less profitable—investment option. Instead, investors are lured in and tempted to chase the large-scale, higher-margin investment opportunities (luxury builds, multi-unit developments, etc.). However, affordable starter homes, whether new construction starter homes or rehab projects, can play a pivotal role in the growth and success of new investors.
From lower costs to fewer risks, buying starter homes can be the most sustainable and advantageous way for beginners to enter the market. In this article, we’ll break down what a starter home is and why some investors still bet on and leverage them to win in today’s markets.
What is a Starter Home?
A starter home is a smaller, often more affordable house designed for first-time homebuyers. For consumers, these homes are often a stepping stone to their larger “forever homes.” For investors, these beginner houses are a bridge to larger investment opportunities.
Starter Home Defined
Some of the key characteristics of starter homes include:
- Smaller Size: Starter home plans are often smaller than other homes in their area. They come with fewer bedrooms and bathrooms and are between 1,500 to 1,800 square feet.
- Fewer Amenities: Since they are designed for first-time homebuyers making the biggest financial decision of their young lives, starter homes often lack grandiose features and amenities that can skyrocket prices.
- Lower Price: These beginner houses are often priced below the median price for the area, making them more accessible to first-time buyers–and investors.
The Benefits of Starter Homes for Investors
While garnering less ROI, affordable starter homes provide a plethora of investment advantages for real estate beginners, including:
Lower Costs & Fewer Risks
Investment beginners often have a smaller budget to work with, making the affordability of these properties alluring.
Starter homes come with:
- Lower acquisition, with the average cost of a starter home in the US priced below $200,000
- Lower construction costs and rehab costs
- Fewer requirements from lenders with lower down payments
More importantly, with less money tied into the purchase of a starter home, there are fewer risks. Every new investor makes mistakes or runs into unforeseen challenges, whether it’s underestimating costs, overlooking hidden damages, or running past deadlines. With lower costs, investors can get hands-on experience rehabbing a starter home while maintaining the capacity to navigate and absorb mistakes or budget overruns.
Simplified Scopes of Work
As mentioned, starter homes for sale often come without luxury, with standard kitchens and bathrooms, modest layouts, and simple floor plans. While the lack of uniqueness can hinder overall value, it simplifies the scope of work for investors. If you’re new to rehabbing or building houses for profit, a simplified, smaller floor plan with less costly construction and finishing costs gives you the flexibility to learn as you go. Additionally, the freedom and knowledge gained through these projects will help investors improve their operations and avoid money pitfalls in the future on larger projects.
Faster Project Timelines
For novice, budget-conscious investors looking to grow, starter homes provide a quick project completion timeline. While the average fix and flip project can take between 4 to 6 months, starter home rehabs are typically completed within 2 to 4 months.
Similarly, new build starter homes take on average 4 to 6 months to complete, which, in the real estate world, is significantly shorter than regular home construction projects that last between 7 to 14 months on average.
These shorter timelines help investors:
- Profit quickly
- Take on more projects annually
- Avoid extended exposure to potential market shifts
Higher Demand
With housing affordability at an all-time low and an ongoing inventory shortage, investors are constantly looking to meet consumer demands with new construction investments. Whether building or rehabbing a starter home for rent or sale, consumers are craving the below-market prices that beginner houses provide.
For investors, this heightened demand translates to seamless exit opportunities, higher rental demands, and steady home appreciation year-over-year.
Priceless Experience
Real estate lenders value experience and success. While private lenders, like Finance of America Commercial, provide fix and flip rehabilitation lending options to investment newcomers, there are more requirements for funding new build projects.
New construction financing often requires a proven track record of successful home flips. With less costs, faster timelines, and more manageable scopes of work, investors can complete one to several starter home projects within a year to gain the necessary experience. A successful track record with starter projects and financial backing from a reliable capital provider can springboard investors into more profitable investment endeavors–and fast!
Easier Financing
With a larger target pool (first-time homebuyers, young families, renters, other investors), lower costs, and fewer risks, financing is often easier to obtain for starter home projects. By working closely with a lender, investors not only gain the funding needed to get started, but they can also build a strong professional relationship that helps open doors to better opportunities down the road.
Building Momentum with Starter Home Projects
A $30,000 profit on a starter home might not seem as appealing as $100,000 returns on a luxury new build. However, chances are the starter home project will be completed in a fraction of the time, with fewer headaches and less upfront costs. Additionally, the project will instill a wealth of knowledge and growth into the minds of real estate investment beginners.
With each starter home project, newcomers gain a deeper understanding of the investment market, as well as confidence, and the skills and resources to continue scaling. That is why so many continue to bet on and leverage starter homes to win in today’s markets.
Building a Starter Home with FACo
For over a decade, FACo has been helping investors of all experience levels grow and succeed in today’s real estate landscape. Our team of industry experts, along with our reliable, fast, and flexible financing options, equips investors with the knowledge, tools, and capital necessary to outpace the competition and capitalize on the latest opportunities.
FACo’s Fix and Flip and Construction Loans provide investors with:
- Flexible term options
- Up to 100% rehab or construction costs
- Snap Draws DIY for faster, easier, mobile draw requests
If you’re an investment beginner or looking to scale through starter home projects, let the knowledgeable team at FACo help guide you to real estate success. CLICK HERE to schedule a FREE consultation with a FACo team member today.
Authored by Bianca Montalvo
SEO copywriter and strategist
