Information on buying our first home?

My fiance and I are looking to buy a home in the next year or two. We live in California and our dream would to have at least 1 acres and 4 bedroom home. However, we are renting right now and really want to stop renting and start saving money to buy that dream home. So we were wondering if it would be smart to move out of our apartment and buy a small 2 bedroom 1 bath home with a small yard. We would then live there for the next 5 years and fix it up. (my fiance is an electrician and works for his brothers electrical company while his other brother owns his own construction company) they would help us possibly add a 3rd bedroom and fix up the kitchen and whatever else needs fixing up. We would then re-sell the home and buy our dream home on some property. Would this be ideal? I understand that anything can happen (we could end up there longer than 5 years, we may not be able to add a 3rd bedroom, etc.) but were trying to make the right decision. So basically it comes down to either
1) buy a smaller home sooner and fix it up to re-sell it OR
2) save up and keep renting for another 2 to 3 years to buy our dream home.

Which would be the smarter move? His brother thinks buying the smaller home will allow us to get out of our apartment and save up more money along with having our privacy and possibly starting a family.
Added (1). @Reenzz - right now we pay $1500 not including utilities. So buying a home we can afford $1500 and fix it up and sell it for more later down the road. Plus, I am talking about buying a home that is literally under $300,000. That really needs some decent work done. This will allow us to keep our mortgage payment down each month.

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