How to remodel without wrecking your finances

How to remodel without wrecking your finances

• More than a third of homeowners struggle to stay on budget for their remodeling project.
• 91 percent of homeowners plan to pay for a renovation at least in part with cash.
• Almost a quarter will pay for their home improvement with a credit card.

Improving your home shouldn’t demolish your finances.

About half of homeowners are either starting or continuing a home remodeling project this spring, according to a new survey from design and remodeling site Houzz. The site polled 95,920 of its users (who, arguably, may be more inclined than the general population to undertake such projects).

How much you can expect to spend varies by project – last year, Houzz users spent an average $11,700 to remodel or add a master bathroom, for example, and $2,800 on laundry room improvements.

Cost is a concern across the board. “Minimizing costs” tied with “increasing resale value” as homeowners’ top renovation priority, Houzz found. “Staying on budget” was the top challenge, with more than a third of homeowners saying they struggled not to overspend.

Here’s how to prepare your finances for a remodeling project:
Assess the investment

If you’re planning to move within a few months or even a year or two, remodeling may not offer a great return on investment, said Angie Hicks, founder of consumer review site Angie’s List. A dollar spent on a renovation doesn’t necessarily translate into a dollar in added home value.

For example, a $62,158 major kitchen remodel recoups just 65.3 percent in resale value, according to the 2017 Cost vs Value report from Remodeling. Spending $71,115 to remodel the basement returns 70 percent.

Look for projects that keep you in line with the Joneses, said Hicks. For example, if your home is the only one in the neighborhood that doesn’t have two bathrooms, adding one could pay off in added value when you sell. But a buyer may not be willing to pay a premium just because you picked granite countertops when your neighbors have laminate.
Save up

More than a third of homeowners told Houzz they waited to renovate until they had the savings to do so. More than nine in 10 are paying for their project at least in part with cash. (See charts.)

That’s smart, said Mark La Spisa, a certified financial planner and the president of Vermillion Financial Advisors in South Barrington, Illinois. Unless that project is an emergency – say, you’re replacing leaking windows – you’re far better off saving up, which can help you spend less, and avoid compromising other goals.

“With financing, you’re paying the full boat price and then interest on top of it,” he said.

Financing can also be costly when it comes to your bigger financial picture, said La Spisa. Someone financing a renovation because they didn’t have savings should consider where they will come up with the extra money to make payments on that debt, he said – and whether they can stay on track with other savings goals, with less money in their budget.
Budget for the unexpected

Once you’ve figured out how much you can afford to spend, total, prepare your budget to cover 90 percent of that amount, Hicks said. Shop for contractors based on that figure, too.

“Give at least a 10 percent cushion for the unexpected,” she said – that way, if the project hits an unexpected snag, you aren’t over-budget.
Compare financing options

If you have to borrow, weigh the costs and benefits of all the options available to you, La Spisa said. Then shop around to make sure you get the best terms possible for that kind of financing.

Tapping your home equity, in the form of a loan or a line of credit, can often be an attractive option because the interest paid is typically tax deductible, he said. But it’s not always easy to borrow.

Borrowing from your 401(k), although the terms can be attractive, should be a last resort to avoid derailing your retirement plans, he said.

Charging the renovation to a credit card isn’t the worst idea, if you can snare a zero-percent offer-and pay off the debt before that offer expires, said Odysseas Papadimitriou, chief executive executive of comparison site But be cautious about taking on debt if you’re hoping the stars will align for you to sell your home – and sell it at a profit – before any promotional financing deals (like a zero-percent balance transfer offer) expire.

“You need to make sure you can afford paying off this debt without the house selling,” he said.
Weigh payment perks

If you have the savings to pay for renovations out of pocket, think carefully about whether to pay via a check or credit. Both have potential advantages. (Skip cash, said Hicks. You should have a trail documenting payment.)

Routing renovation spending through a credit card gives purchases extra layers of protection from federal law and individual card perks. You could also earn enough rewards to cover say, your next vacation.

“Some of the best rewards cards get close to 2 percent, never mind the initial bonus,” said Papadimitriou. “There’s a ton of money to be saved.”

But that strategy relies on you being able to pay off the balances in full, avoiding interest charges.

“Paying with a check could ultimately leave more in your pocket,” said La Spisa. “Contractors may pass along the fees to process credit card charges, adding roughly 2 percent to 3 percent to your bill. You can avoid that with a check”, he said – and you may find it easier to stay on budget.

“Studies show that a person using a credit card tends to spend more than they would using cash, upwards of 40% more, which defeats the benefit of the points,” he said.
Pay in installments

“Don’t pay for everything up front,” said Hicks – you could get burned if the work isn’t up to par or the contractor disappears.

Contracts typically set out payment in installments. Tie those to completion of various tasks or stages of the project rather than dates, she said. That way if there’s a delay, you won’t have paid for 75 percent of the project when only 25 percent has been completed.

© Provided by CNBC, Kelli B. Grant
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A few more thoughts from Mark La Spisa…

“How to remodel, without wrecking your finances”

In the world of finance, this is not what I consider one of the most important topics because not all people remodel their homes, and when they do, it is an infrequent event. That said, it is a nice subject to be able to discuss from time to time.

Kelli did a good job in her research; I thought the facts were current, accurate and well presented. In addition to her information, here a few more points to consider:
Start with an appraisal of your current home, and a market survey of houses that will be comparable to yours after the remodel.

This may give you more information necessary to determine your building priorities and your budget. In the end, you do not want to develop a property that becomes too expensive for the area and makes for an inevitable loss of value in re-sale.
If you have the time and ability to “do it yourself” or DIY, then sweat equity certainly can stretch a budget.

People oftentimes think that if they “do it themselves”, the money not paid to a contractor would be saved – dollar for dollar. Unfortunately, this is generally not the case. Contractors have years of experience and the promise of future work to help reduce their subcontractor costs. When “do-it-your-selfers” try to be their own general contractor and gathers quotes, they often do not realize what items are missing, or what the correct line item costs of each step or piece of the project really are. Therefore, when items have to be adjusted on site during the project, unforeseen problems can occur and costs usually rise, potentially eating up all the sweat equity savings.
Sometimes, depending how well the homeowner is experienced with building material values and expenses, it may help lower costs if you provide the materials rather than rely on the contractor to do it all.

But, without a professional’s experience, a cheaper $500 door may seem a better choice until problems occur, labor costs rise, and limited warranties eliminate all savings. Be smart and be careful.
If there are no plans for selling the house, there may be a financial advantage to doing your remodel in phases.

Sometimes this makes a lot of sense. With a first phase or preliminary work, a homeowner can test out a contractor and evaluate their communication skills, reliability, follow through, problem resolution, and their ability to stick to a budget. Then a homeowner can feel more confident about adjustments to plans, and completion of the full project.
A remodel is a major purchase that needs just as much planning as buying or building a new home.

It is not a simple change or repair, like painting walls or fixing a roof. A remodel will require a lot of capital, financial analysis, scheduling, and goal setting. Why are you making this change? What is the full extent of this project? What is your timeline? What can you afford, and what resources are there for your use? Most importantly, what will you do if problems occur and additional resources are needed to extend the budget?

Continue with these steps – download and print your free copy of
“10 Steps to consider when starting a remodel or home addition”
Download Now

Like with any big event, do not start your remodeling project without first talking to your Vermillion Advisor.

Wishing you financial prosperity,

Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.