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General BuyerBuy the starter home if you can hold it about five years. Selling costs in California run roughly six to ten percent of the sale price, which consumes most of the equity a shorter hold produces. Past that point, principal paydown and appreciation together are usually what fund the move up to the larger house.
A couple I talked with recently rents a two bedroom in San Diego North County for a little over $3,000 a month. They want a $1.2 million home. Today they qualify for about $700,000. Their plan is to keep renting and saving until the $1.2 million house is reachable.
That plan is reasonable and it is also expensive. Here is what the next seven years look like both ways.
What renting costs while you wait
Rent across San Diego County runs somewhere between roughly $2,580 and $3,030 a month depending on which source you use and what you are renting. Sources vary considerably, so treat those as a band rather than a figure. At $3,000, five years of waiting is $180,000 handed to a landlord, and California allows annual increases on older buildings, so that number is probably low.
None of that comes back. That part of the argument is completely sound, and it is the reason most people should stop waiting.
Month one: the part nobody warns first-time buyers about
Here is where the usual version of this advice gets sloppy. People say that when you own, every payment builds something that is yours. That is true, and in the first year it is a much smaller number than it sounds.
On a $700,000 loan at around 6.4%, principal and interest run roughly $4,378 a month. Add property taxes and insurance and you are near $5,200 before any HOA dues. Rates are running between about 5.99% and 6.57% depending on the tracker, so your figure will move.
Of that first $4,378 payment, about $3,733 is interest and about $645 is principal. You did not stop paying somebody else. You changed who you pay and you took on a larger payment than your rent. Anyone telling you the starter home is cheaper month to month at current rates is not showing you the math.
What you bought is not a lower payment. It is a position.
Year three: where people get hurt
Three years in, you have paid about $25,500 in principal. It feels like progress until you list the house. Total seller costs in California commonly run six to ten percent of the sale price once brokerage fees are included.
In a flat market, that math is ugly. Selling a $700,000 home at seven percent costs about $49,000 against $25,500 in principal. You come to the table short.
This is the single most important thing in this entire post and it is almost never said out loud. A starter home sold at year three is usually a loss, not a stepping stone.
Year five through seven: where the argument becomes true
Now run the same house forward. The table below assumes a $700,000 purchase and shows two scenarios, one with no appreciation at all and one at three percent annually, which sits inside the two to four percent range local forecasters have been using this year.
| Hold period | Principal paid | Net equity, flat market | Net equity, 3% annual growth |
|---|---|---|---|
| 3 years | About $25,500 | Roughly negative $23,000 | About $37,000 |
| 5 years | About $45,500 | Roughly breakeven | About $100,000 |
| 7 years | About $68,000 | About $19,000 | About $169,000 |
Net equity figures are after estimated selling costs at seven percent. Appreciation is an assumption, not a promise. San Diego readings this year have ranged from slightly negative year over year to up nearly three percent depending on the source and the geography measured, so build your plan on the flat column and treat growth as upside.
At year seven with normal growth, that couple has something close to $169,000. On a $1.2 million home, that is a real down payment, and it arrived while they lived in a house instead of a rental.
That is the actual answer to the question. The starter home works. It just works on a timeline, and the timeline is roughly five years, not two.
Pro Tip: Before you buy the smaller house, ask yourself one question that has nothing to do with money. Could you live there for six years without resenting it? Not love it, live in it. Most people who sell a starter home too early do it because the house made them miserable, not because the market moved. Buy the one you can tolerate longest, not the one that is cheapest.
If you are buying on orders, read this part twice
Military buyers face a version of this problem that civilians do not. A typical assignment cycle can end well before the five year line, which is exactly the window where selling costs eat the equity.
That does not rule out buying. It changes what you plan for. Veterans and military buyers using a VA loan have a path that most first-time buyers do not, which is keeping the first home when orders come and financing the next one rather than selling into a bad window. There is a full breakdown of how that works on the blog, including how remaining entitlement affects the second purchase.
If PCS orders are anywhere in your next three years, treat the starter home as a property you may hold rather than one you will flip. That single change in assumption makes the purchase far easier to underwrite emotionally.
Ask Your Lender This
Two questions, word for word:
- "On this loan amount, how much principal will I have paid at the end of year three and year five?"
- "If I keep this home and buy another one later, what does that do to what I qualify for?"
The first gives you the real number instead of the encouraging version. The second tells you whether the move up you are planning is actually available to you.
Back to that couple
They are not choosing between a small house and a big house. They are choosing between owning something imperfect for the next seven years and owning nothing for the next seven years while paying nearly as much every month.
Put that way, it is a much easier decision, and it is the one most people get to the dream home through. If you want to run these numbers against a specific price point and a specific timeline, get in touch and we can build it out for your situation. You can also reach me at (619) 485-8293.
Frequently Asked Questions
Should I buy a starter home or wait for my dream home?
Buy now if you can hold about five years and the payment fits without straining you. Wait only if a specific event inside the next twelve to eighteen months meaningfully changes what you qualify for. Waiting indefinitely for a number that keeps moving is how people spend a decade renting.
Is a condo a bad starter home?
Not inherently, though the math needs an extra line. HOA dues are a payment you make forever with no principal attached, and condo appreciation has lagged detached homes in several San Diego submarkets recently. Run the dues into the monthly number before you compare it to rent.
How much does it actually cost to sell in California?
Commonly six to ten percent of the sale price including brokerage fees, and roughly one to three percent without them. That spread is why the hold period matters more than almost any other variable in this decision.
What if home values drop after I buy?
Then the flat column in the table above becomes the optimistic case, and you hold longer. This is a real possibility, not a hypothetical one, which is why a starter home purchase should never depend on selling by a specific date. Buy on the payment you can carry, not on the exit you are hoping for.
All figures are illustrative and based on published rate averages, county level rent and price data, and common California cost ranges. Sources for San Diego medians and rents vary considerably. Appreciation assumptions are not predictions. This content is for informational purposes only and is not legal, tax, or financial advice. Consult your lender and a qualified tax professional before making a purchase decision. All real estate services comply with NAR, HUD, and California DRE regulations.
