When considering the small vs. big home question, you should first remember the old adage regarding real estate: “location, location, location.” That is still a more important factor than size. But, if you are considering homes in essentially the same location, is the smaller or larger one the better investment? Which one will you give you a greater financial return?
The Small vs. Big Home Question
Generally, smaller or less attractive homes provide a better return on your investment because all homes in a neighborhood generally appreciate by about the same amount each year. The actual physical structure depreciates; it’s the land that rises in value. So when contemplating an investment, consider the location. Which types tend to appreciate the most? First, let’s look at the key drivers of land value.
Schools and Community
High on the list of most home buyers or renters, especially those with children, are the quality of local schools and the sense of community. “Buyers increasingly value community in the community where they’re buying,” Amy Anderson, an agent with Davidson Realty, Inc. in Jacksonville and St. Augustine, Fla., told U.S. News & World Report. “They come to me not looking for a house for four years but focusing much more on the community, the activities and the school district.”
Seniors and younger people without children frequently seek locations in which one can easily walk to stores, parks and other amenities. “I think walkability has become more important in many markets, especially amongst Millennials,” Ken Wilson, past president of the Appraisal Institute, told U.S. News & World Report. “You’re also finding empty nesters that are looking into properties that have walkability.”
Now let’s consider other factors. Many people are no longer looking for that McMansion because they realize that a big home requires more upkeep, leaving them with less time and money to do the things they want. Even better, smaller homes are usually less expensive than larger homes in the same neighborhood, although sometimes you will find a pricier one thanks to renovations or special upgrades. But can a home be too small? Houses under 1,000 square feet were very sought after for a while (see Financial Considerations of Buying a Tiny House), but for some buyers they lost their popularity as people started to have families. (For more, see McMansion: A Closer Look at the Big House Trend.)
Reduce Debt and Risk
Every investor wants to reduce his risk. By buying a smaller home, an investor will pay less, need less money for a down payment and incur lower long-term debt. This will also cut monthly expenses and increase the likelihood that the home can be profitably rented.
Age and Condition
Unless you are deliberately looking for a cheap fixer-upper, secure in the knowledge that you can do the necessary work and still pay less than for a fully renovated home, age and condition are key factors. “Someone will pay $15,000 more for a well-kept house that’s move-in ready than they will for a house that needs $5,000 worth of work,” Anderson said to U.S. World & News Report. So when you are ready to sell, be sure that the home is in good condition, to maximize the price and improve your profit. (For more, see Buying a Home: Brand New vs. Fixer-Upper.)
History can add value, but it also costs more. For example, a home built in the early 1900s will likely command more than one built in 1970. But the older home will almost certainly need more work in the long term, so it can be a riskier choice as an investment. If you are handy and can do the renovations yourself, it could be a good decision.
The Bottom Line
A smaller home tends to provide greater profit potential on your investment because it requires less money down, creates lower debt and can be easier to sell than a large home. Still, the most important thing to remember when purchasing real estate are those three enduring principles: “location, location, location.”