Almost everything my DS2 wears is a hand me down from DS1. This has worked great for baby clothes as they are mostly in pristine condition. This won't work when DS2 is older though as DS1 started kindy at 2 years 8 months and pretty much all of his clothes now get holes in knees, indelible paint stains, mud stains, what have you, and are in poor condition no matter how well I wash them when he grows out of them, so there isn't a lot that will last through two kids from that age onwards. I did also have a small problem with them being born in different seasons with the size not lining up to the type of clothes, but no biggie.
Nothing wrong with good condition hand me downs to younger kids, especially while they are too young to know or care.