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Paying for home renovation

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  • Paying for home renovation

    Hey all - have a question for those who know more about mortgages than I do.

    Looking at a fixer upper for about 400K

    Salary around 550K, maxing retirements, 20% saved etc. No debt, and have 230K in cash for home buying, Reno earmarked.

    The home is in a really great neighborhood but I think needs 200-300k of work to be our long-term place. No other homes in this area that are available.


    My question is how to approach this purchase and renovation.

    1. Plan was to put at least 20 % down (80k) with 15 year mortgage.

    2. Not sure how to pay for renovation. Plan A would be just to wait and pay cash for it (prob 2-3 years away from doing that). That would be the debt-adverse, conservative option that I like the best.

    What other ways could you borrow some money to do it sooner? Put all money towards down payment then HELOC? Are there rules about how soon you can do that after buying the home?

    Home construction loan? Just not sure what makes sense if we wanted to do it sooner than waiting to pay in cash.




  • #2
    I would recommend putting 20% down and paying for the renovation with cash as you suggested.  A HELOC is an option, however with only 20% equity in the home, you will not get a favorable rate.  Also both House and Senate versions of the tax reform plan disallow HELOC deductions from your income.


    • #3
      Is there a reason you are going after a renovation of this magnitude? Sounds like a big stress. Is there a house in the 6-700 range that is more move in ready?


      • #4
        I think doing a cash flow plan is the best bet.  Renovating an entire home is expensive and time consuming and hard to predict how much you'll need.  Plus, it would be difficult to get a loan for renovations of this magnitude.  If you're certain the house is what you want and the renovations are worth it, start getting estimates and researching contractors for the work.  That's the most difficult part.  Ask for references and interview their past clients.  But, yeah, I would get a standard 20% down mortgage and pay cash for the rest sticking to your set dollar amount.


        • #5
          Physician's especially those with your salary shouldn't have to worry about renovating a home, unless its a few small projects, renovation is a passion, or maybe you plan to flip it. But I agree with above, why not just get something more move in ready, you can afford it.


          • #6
            I would do the 15 year mortgage with 20% down and then do the renovations slowly from cash flow.  That is what I did.


            • #7
              Thanks for the input.

              There are plenty of homes that are more expensive in the area, just not in the location and what we are interested in buying. Maybe we are just gluttons for punishment, but we like the idea of making our house exactly what we want.


              • #8

                Is there a reason you are going after a renovation of this magnitude? Sounds like a big stress. Is there a house in the 6-700 range that is more move in ready?
                Click to expand...

                Also doing a renovation that is 50-60% of purchase price would make me worried that I was overbuilding the neighborhood.


                • #9
                  Yes - a renovation of that magnitude would make the home at the top end of the market in the neighborhood, which is not ideal.

                  I guess the way I look at is why buy a newer home for more money that is not exactly what we want, when we can renovate a less expensive home in a nicer neighborhood as have exactly what we want.


                  • #10
                    Any renovation like that is going to be a serious money loser.  Some banks offer construction loans if you really want to do it though.  Do not do a HELOC after putting extra into a down payment.  That makes no sense.

                    Be careful or you may end up like this guy...


                    • #11

                      Yes – a renovation of that magnitude would make the home at the top end of the market in the neighborhood, which is not ideal.

                      I guess the way I look at is why buy a newer home for more money that is not exactly what we want, when we can renovate a less expensive home in a nicer neighborhood as have exactly what we want.
                      Click to expand...

                      In the end it doesnt matter that much. Most people dont stay in their homes for 30 years, its likely you end up moving on or up in 10, all that renovation will be lost for the most part. Whats ideal for you is likely not for others, diminishing resale value.


                      • #12
                        I personally am dying to do a big reno on a fixer upper. But you should know what you are getting yourself in to. If you put 80k down, that will leave you with 150k for reno. I think you could probably get the house to move in condition with that budget, then do further renovations down the road as you can cash flow it. But I would also be careful about over doing it and losing money if you decide to move in 5-10 years. If it's the nicest home in the neighborhood, maybe you should be looking at other neighborhoods.


                        • #13
                          I agree and understand what everyone has said.

                          My only counterpoint would be that if you view a house as a hybrid between a consumption item and an investment, a renovation that increases your home re-sale value and fullfills your wants,  why does it have to make you money or break even? (as long it doesn't break the bank and put you in a financial hole). If I was given the choice between working an extra year or two and living in the house I wanted vs FIRE, I think I'd choose the former.






                          • #14
                            20% down is 80k.  That leaves $150 in pocket.  Buy the house.  Do some touch up stuff, but nothing drastic.  Live in it for 6 months to a year.  You'll have a much better appreciation for how you "live" in the house, ie what rooms are most important.

                            Start the renovation.  Budget 20% greater than your quotes.  Put money into the key features, but avoid going hog wild.  Any neighborhood with 400k+ fixer uppers will handle whatever renovations you do, as the location is likely the big driver of value.  Location is the one thing new homes cannot compete on.

                            Round one of the renovation doesn't exceed the cash on hand.  Focus on the "money rooms", ie Kitchen and Master bath.  Continue to save during this time.  At this point, you will have either saved up enough for phase 2 of the renovation, or else you will have added enough value to the house that you can now REFI/HELOC based on a new appraisal.


                            If you live in the house long enough, it's ok to pay for what you want to live in where you want to live.  It's not a rental house (straight business decision), it's your home (emotional decisions are ok, so long as you can truly afford them, best not to be straight up stupid though).


                            • #15
                              This hits close to home, no pun intended...I can share my story and maybe you can learn some from it. Bought an $850,000 dollar home in one of the top neighborhoods in the state. On a dead end gated private road, next to national forest, beautiful 270-degree 30-mile views. Home is 7000 sq feet but one of the smallest in the area. It is a fixer-upper. Was built in the early 80s and the original owners did nothing to it until last year other than a new roof. We are cash flowing all the renovations and we budgeted $100,000/year over 4 years to make it top-notch. Year one we spent $120,000 but did more than planned. Some lessons learned:

                              -Location location location. If the location does not warrant it, stop right now.

                              - Be a small fish in a big pond. I would never invest as much money and time making this the best house in the neighborhood. Bringing this home to the average of the area equals a selling price around 1.5 mil.

                              - During a strong economy, good contractors are booked solid for months in advance, will take twice as long to do the work since they are overbooking themselves, and basically it is their way or the highway

                              -I agree with what is said above to live in the house as is for a while to see what you actually like and what actually bugs you

                              - For us stage 1 is stuff the must be done to avoid future extensive problems and to resell the house quickly if needed without a loss (stucco, windows, soffits, gutters, exterior flashing/weatherproofing), stage 2 is master suite and kitchen plus in-law apartment, stage 3 is living room/dining room/pool. Add stage unexpected (AC units, furnaces, and convenience of access as in "while the ceilings are down lets run new water lines so I can get hot water in 10 seconds rather than 1 minute" sort of stuff). Other stuff is unstaged (big paycheck this month went to guest-room renovation and so on). At some point in the future the landscaping needs to be redone, along with a new driveway. Oh somewhere in all of this there are about 1500 sq ft worth of decks plus supporting posts to redo, outdoor lighting, family room, half baths, mud room, garage, fireplaces, theater room, water heaters, roof heating tape, irrigation system, attic insulation/ventilation....ok, did I make my point?

                              -You need to really like doing this. I love every minute of it and I am very hands-on and know what I am doing and what to look for. Even so, some days I just want to pull my hair out

                              -Go as small as you can. Renovating 3000 sq feet is a lot cheaper than 7000 sq feet. Unfortunately because of family size and parents living with us, this is as small as I could do while keeping the family in harmony

                              -Do it right the first time, do not cut corners or use cheap/bad workmanship or use cheap materials. It will be noticed and you will pay the price for it.

                              -Our priority is to contribute the maximum to all our retirement accounts (120k/year), 529s, some taxable account contributions and a solid emergency fund, extra payments to student loans. After all this is done, then and only then, we allocate $$$ for renovations. If the money is not in the bank, the renovation is postponed

                              Overall I'd do it again because I enjoy the process, my family is very happy with the house, it is going to be a spectacular property once done, and luckily our income allows us to do it. Oh, we are also in a low property tax state. No way I'd buy this house in NJ, NY, CA, or such.