Author Topic: Best Way to Save for a Home Renovation/Addition  (Read 2672 times)

ReadySetMillionaire

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Best Way to Save for a Home Renovation/Addition
« on: February 01, 2018, 09:12:53 AM »
I love my 1,100 square foot house and have posted about it many times on here.  We've done a very good job of keeping it spacious before (God-willing) we have children--there's nothing in the two other bedrooms, half the basement is empty, barely anything in the garage/attic, etc.  It is three bedrooms and one bath, although the one bedroom is probably 9x8 and not really functional to be a bedroom long term.

Once we do have kids, however, we are likely going to need to undertake one of two projects.  Option 1 is to finish the remainder of the basement to add a bathroom and bedroom down there.  We got a rough quote and this would cost about $16-18k, although this would completely compromise my fitness room that has been immeasurable in helping me get back into shape for the first time since high school.  Losing that space would really upset me and there's really nowhere else to put the equipment (elliptical, spinning bike, dumbbell set, bench).

So, Option 2 is that we add some space to the house.  It will be a total of 16x32 feet (512 sq. ft.) and would consist of a "sunroom" and master bedroom with its own bath.  We got a rough quote that this would be about $65,000 and possibly less depending on what we wanted, and given that I'm pretty frugal, I'm hoping I could come in here at around $55,000.

Obviously Option 2 is way more expensive and we're not sure what we're going to do, but I'd like to start saving for either one of these projects.  What is the right savings vehicle? Should I just take out equity or get a home construction loan and add it to our mortgage when the time comes? My Google searches aren't really yielding any results, so any and all help would be appreciated.
« Last Edit: February 01, 2018, 09:25:41 AM by ReadySetMillionaire »

boarder42

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #1 on: February 01, 2018, 09:38:01 AM »
what i would do / am doing for our upcoming reno's

100% invest in VTSAX -

Why?

The reno isnt required you can make do with out it being done
You're more likely to make money than to lose money
Since the reno isnt 100% required you dont have to sell in a down market you can just postpone it and wait. 
Take the stastically best chance for your money since you have the extra bedrooms already. 

I'd do a construction loan for the addition - the basement refinish is likely not going to add a ton of value to the home but roll whatever you can into fixed low cost debt and take it to the full 30 year term if you can - with rates rising this could be an interesting math equation depending on when you do it. 

why is there no option 3 - move to a house that suits your needs(wants) i doubt you add 65k of value to your home with this addition.

mm1970

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #2 on: February 01, 2018, 10:53:22 AM »
what i would do / am doing for our upcoming reno's

100% invest in VTSAX -

Why?

The reno isnt required you can make do with out it being done
You're more likely to make money than to lose money
Since the reno isnt 100% required you dont have to sell in a down market you can just postpone it and wait. 
Take the stastically best chance for your money since you have the extra bedrooms already. 

I'd do a construction loan for the addition - the basement refinish is likely not going to add a ton of value to the home but roll whatever you can into fixed low cost debt and take it to the full 30 year term if you can - with rates rising this could be an interesting math equation depending on when you do it. 

why is there no option 3 - move to a house that suits your needs(wants) i doubt you add 65k of value to your home with this addition.
I was going to say this, ha!

My own situation:
2BR, 1 BA, 1146 sf house.  No basement, no attic, no garage, whee!

Family of 4 (2 parents, 2 elementary aged boys).  Boys share a room, bunk beds, the beds and a single dresser fill the room.

So, you don't really need more space yet.  So, I'd worry about it later.

Now, to be honest, I'm jonesing for a 2nd bathroom.  I really really want one.  I can afford to pay cash for one, but at this point, I'm kind of just waiting to make sure I have a job for 2 more years.

I estimate that a bathroom will be $30-50k.  A lot of that is permits.  We aren't talking a fancy bathroom either.  I'm considering adding a bedroom also, or at the least,  "losing" the front porch (which is 5x10) and absorbing it into the boys' room.  All in all, we'd be adding about 100-125 sf.  Haven't started the process.

I have friends who are recommending that because kids "boomerang", that I really should go "up" (very small lot, not much room for "out") and add a bedroom and a bathroom to end up with a 3/2.  Problem is, I've lived here a long time and I know the drill.  First, we'd have to move out.  For months.  Second, house built in 1947, you'd have to completely redo the foundation to add a 2nd story.  Third, 2nd stories are about $200k.  Will adding a 2nd story make my house worth $200k more?  (aka, a million bucks? ) no.  So then you think of the alternative, which is just buying a different house/ bigger house.

Of course, I'm not wanting to do that because I like my neighborhood & my neighbors.  You just can't buy that anymore.  Well, you can, but it's going to be expensive.  Prop taxes are an issue too.

lbmustache

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #3 on: February 01, 2018, 11:09:30 AM »
Can the 9x8 room be turned into your "gym" and the basement be finished?

BuildingmyFIRE

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #4 on: February 01, 2018, 11:14:57 AM »
what i would do / am doing for our upcoming reno's

100% invest in VTSAX -

Why?

The reno isnt required you can make do with out it being done
You're more likely to make money than to lose money
Since the reno isnt 100% required you dont have to sell in a down market you can just postpone it and wait. 
Take the stastically best chance for your money since you have the extra bedrooms already. 

I'd do a construction loan for the addition - the basement refinish is likely not going to add a ton of value to the home but roll whatever you can into fixed low cost debt and take it to the full 30 year term if you can - with rates rising this could be an interesting math equation depending on when you do it. 

why is there no option 3 - move to a house that suits your needs(wants) i doubt you add 65k of value to your home with this addition.
I was going to say this, ha!

My own situation:
2BR, 1 BA, 1146 sf house.  No basement, no attic, no garage, whee!

Family of 4 (2 parents, 2 elementary aged boys).  Boys share a room, bunk beds, the beds and a single dresser fill the room.

So, you don't really need more space yet.  So, I'd worry about it later.

Now, to be honest, I'm jonesing for a 2nd bathroom.  I really really want one.  I can afford to pay cash for one, but at this point, I'm kind of just waiting to make sure I have a job for 2 more years.

I estimate that a bathroom will be $30-50k.  A lot of that is permits.  We aren't talking a fancy bathroom either.  I'm considering adding a bedroom also, or at the least,  "losing" the front porch (which is 5x10) and absorbing it into the boys' room.  All in all, we'd be adding about 100-125 sf.  Haven't started the process.

I have friends who are recommending that because kids "boomerang", that I really should go "up" (very small lot, not much room for "out") and add a bedroom and a bathroom to end up with a 3/2.  Problem is, I've lived here a long time and I know the drill.  First, we'd have to move out.  For months.  Second, house built in 1947, you'd have to completely redo the foundation to add a 2nd story.  Third, 2nd stories are about $200k.  Will adding a 2nd story make my house worth $200k more?  (aka, a million bucks? ) no.  So then you think of the alternative, which is just buying a different house/ bigger house.

Of course, I'm not wanting to do that because I like my neighborhood & my neighbors.  You just can't buy that anymore.  Well, you can, but it's going to be expensive.  Prop taxes are an issue too.

^
This is nearly our exact situation.  We are in an old house in a very HCOL area.  One bathroom (vintage to the 1940s), 2.5 bedrooms, which is fine while the kids are small.  Saving in the Vanguard TSM ETF fund and hope to be in a position to take the next steps in 2-3 years.  Can always delay renovation /move if we hit a bear market, but its the best chance over the "long" term to grow savings.  That said, our fence is not going to last 2-3 years and not sure what to do yet about that (see my other post from today...) 

MayDay

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #5 on: February 01, 2018, 11:37:17 AM »
What do you want a 4th bedroom?

Why not just put in a basement bath?

A 9x8 bedroom is 100% fine even for teenagers (I grew up in a house like that and my brother who is 6'7" had it until 11th grade with an XL twin bed).

ReadySetMillionaire

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #6 on: February 01, 2018, 02:11:17 PM »
If it matters, our house was $127k and, in the early years of our careers, we make about $110k jointly. I just got a new job and I expect our joint income to be $135-145k this year.

In terms of FI, doing something like this may postpone retirement by six months to a year. Yes, $60k is a lot, but in terms of time versus utility, remodeling/adding onto a house that we love and intend to live in for the rest of our lives seems like a good decision.

So I appreciate the objections to doing this in the first place, but Iíve already somebody that analysis and  Iím just looking for the financial aspect of how to save and whether to take out a loan.

index

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #7 on: February 01, 2018, 02:38:16 PM »
Keep in mind adding an addition to the house will count towards the above ground square footage and increase your homes value more than the basement renovation. Just looking at your homes size and what you paid for it your house is worth about $115/sq ft so adding 512 sq ft. will add about 60k to your homes value. Keep in mind these quotes may be underestimating the cost of your renovation. I would anticipate a 30% contingency.

How long do you anticipate saving for the renovation? The plan to save using VTSAX is a truly horrible idea if you are planning on saving the money in one or two years. Equities are not vehicles for short term savings. Just as an example. Lets say the market VTSAX returns 10% this year and next year and you can save 25k per year for the renovation. The first year, your returns will be ~$1250, year two returns are ~$3750. So if everything goes perfectly and you make above average returns you make about $5k in capital gains which is about 4k after taxes. This represents about 2 months of savings at your 25k/yr rate. 

If the market has a 20% correction (typical) at the end of year 2; the renovation savings will take a 10k hit which will set you back 5 months or more if you refuse to sell at a loss.     

MayDay

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #8 on: February 01, 2018, 06:03:26 PM »
I strongly encourage to look at others houses in the neighborhood before you do an addition. I get liking the neighborhood but look at what 4 bed 2 bath houses sell for and see what come out ahead.

ReadySetMillionaire

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #9 on: February 02, 2018, 07:20:13 AM »
Keep in mind adding an addition to the house will count towards the above ground square footage and increase your homes value more than the basement renovation. Just looking at your homes size and what you paid for it your house is worth about $115/sq ft so adding 512 sq ft. will add about 60k to your homes value. Keep in mind these quotes may be underestimating the cost of your renovation. I would anticipate a 30% contingency.

The bolded is part of our thinking.  Renovating the basement adds almost no value, but doing an addition at least increases the home's value.

I strongly encourage to look at others houses in the neighborhood before you do an addition. I get liking the neighborhood but look at what 4 bed 2 bath houses sell for and see what come out ahead.

Good advice, and I've been looking at this lately because I'm relatively clueless about whether an addition is worth it (which is why I posted). The least expensive house in our desired school district is $162,000, and just looking at the pictures, pretty much the entire interior would be a step down from our current house (which was nice and upgraded when we moved in).  A comparable ranch is currently listed at $196k, although I do have a real estate friend who could probably advise me about similar comps.

By multiple accounts, when we bought our house, we got a really good deal.  The sellers were asking $136k and absolutely needed to move out, and we got them all the way down to $127k. 

So I need to do more research, but I think doing an addition will probably increase our home's value by $50k, and if it costs $60k, that's probably worth it.  But again, I need to do more research on this.

boarder42

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #10 on: February 02, 2018, 07:31:38 AM »
Keep in mind adding an addition to the house will count towards the above ground square footage and increase your homes value more than the basement renovation. Just looking at your homes size and what you paid for it your house is worth about $115/sq ft so adding 512 sq ft. will add about 60k to your homes value. Keep in mind these quotes may be underestimating the cost of your renovation. I would anticipate a 30% contingency.

The bolded is part of our thinking.  Renovating the basement adds almost no value, but doing an addition at least increases the home's value.

I strongly encourage to look at others houses in the neighborhood before you do an addition. I get liking the neighborhood but look at what 4 bed 2 bath houses sell for and see what come out ahead.

Good advice, and I've been looking at this lately because I'm relatively clueless about whether an addition is worth it (which is why I posted). The least expensive house in our desired school district is $162,000, and just looking at the pictures, pretty much the entire interior would be a step down from our current house (which was nice and upgraded when we moved in).  A comparable ranch is currently listed at $196k, although I do have a real estate friend who could probably advise me about similar comps.

By multiple accounts, when we bought our house, we got a really good deal.  The sellers were asking $136k and absolutely needed to move out, and we got them all the way down to $127k. 

So I need to do more research, but I think doing an addition will probably increase our home's value by $50k, and if it costs $60k, that's probably worth it.  But again, I need to do more research on this.

this is a common thought mistake - you're comparing what you paid for your house plus what your addition would cost you to comps.  you need to compare what you could GET for your house if you sold it plus the cost of the reno to determine your ROI - otherwise you could sell your house and move to the other houses for a lower cost.

frugaliknowit

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #11 on: February 02, 2018, 07:51:03 AM »
I tend to think making major additions is a money loser, unless you plan to stay there forever.  Even when one plans to stay forever, often forever is not forever.

That said, I have a kind of "parallel situation".  Currently I am able to live "car free".  I am always thinking this will not be forever.  For example, if I lose my job and cannot find a replacement in the city, I will need a car (maybe that's overthinking...).  For this reason, I  have a car fund (this is kind of like your "possible renovation fund").  I keep it in a balanced fund (I know, nearly everyone on this site is "pedal to the medal", but a lot of folks on this site haven't been caught holding the bag through 2008 or 1987).

I am using Vanguard Tax Managed Balanced Fund (stocks + Muni Bonds) for the car fund.  It shouldn't drop more than ~20% on a given year and averages ~6-7% long term. 

mm1970

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #12 on: February 02, 2018, 02:13:41 PM »
I strongly encourage to look at others houses in the neighborhood before you do an addition. I get liking the neighborhood but look at what 4 bed 2 bath houses sell for and see what come out ahead.

I agree and disagree...because it depends.

One of my friends recommended this, namely - they suggested I figure out what a second story would cost (or just a 2nd bath), then look at homes that already have them, so see what comes out ahead.

Here's why it depends:
California, Prop 13.  If  I add a BR and a bath at $120k, my prop tax basis only goes up $120k.  So, let's say my new prop tax basis is $900k.
If I want to buy a house in my hood with 3BR and 2BA, because the market is pretty strong right now, it would be more like $1M to 1.1M.  (~1400 sf)
So, prop tax is higher for the "new" bigger house vs the "old" bigger house.
(That doesn't even go into the cost of selling the house.)

Then there's the "neighbors" issues. You can get some crazy ones.

What also depends is if you plan on moving.  I pretty much hate moving, so I pretty much think I will retire in this house, the first and only one we've bought.  Others buy and sell every 5 years.

ReadySetMillionaire

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #13 on: February 02, 2018, 02:50:52 PM »
this is a common thought mistake - you're comparing what you paid for your house plus what your addition would cost you to comps.  you need to compare what you could GET for your house if you sold it plus the cost of the reno to determine your ROI - otherwise you could sell your house and move to the other houses for a lower cost.

Your analysis is definitely more precise, but if we want to get even more precise, then it is also necessary to determine costs of selling my current house, moving, buying the new house, and making any upgrades there.

We've made a few improvements and the real estate market has remained pretty good, so I think we could sell our current house for $130,000.  That sales price would put the commission at $8,000.  Then I'm guessing it would cost $500 to rent moving trucks for a day.  And although our house was in pretty good shape, doing all the usual things you do when you move into a house (paint, clean up, change a thing here or there, buy something for a particular room), I bet we spent about $3,000 on stuff just moving in.

I mean, the analysis could go on and on and on, and I guess my point is that the math won't come out far enough ahead to make me want to move.

ToTheMoon

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Re: Best Way to Save for a Home Renovation/Addition
« Reply #14 on: February 02, 2018, 02:53:30 PM »
It is really awesome that you are trying to plan ahead - that said, I think you have way more time than you think to sort all of this out.  You don't have any kids yet!  Keep on throwing your cash into your FIRE fund, and worry about withdrawing/saving for this a few more years down the road.

Keep in mind that once kids are in the picture, you don't immediately need more space.  We have a very similar sounding home (1060 sq ft, 3/1, with one of the bedrooms being 8.5' x 9.5' - that is the one both of our boys still share and they don't have a bunk bed!  Ikea makes an in between crib/twin sized bed, and two of them plus a dresser and bookshelf fit fine.) 

We are FINALLY starting to feel the crunch where more space would be nice, and are looking to also finish our basement and add a second bathroom.  Our kids are 6 & 8 years old.  Most of the space crunch comes from the fact that we like to entertain, but all of our family and friends also have kids now so we fill up our house quickly.  Being able to send the kids downstairs to play while the adults visit will be amazing!

TL/DR: Sock away your cash just as you have been doing, make your babies, use the space you currently have, and in 5+ years take a look at this again.  No point in paying extra property taxes/heating bills for space you will not need for many years into the future.

ETA - We intend to pay for these renovations by suspending our savings this year and cashflowing it, or taking out a loan if the interest rate is reasonable enough to justify that instead.  Not sure yet. :)

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« Last Edit: February 02, 2018, 03:23:20 PM by ToTheMoon »