The past few years have brought about significant changes in the way Americans view their homes. The COVID-19 pandemic and subsequent shelter-in-place orders have prompted a surge in home renovations as families adapt to remote work and homeschooling. Additionally, rising home prices and interest rates have led many prospective homebuyers to consider renovating their current homes instead. If you find yourself in a similar position, it’s essential to research and understand the costs associated with home renovations. In this article, we will explore the average costs for different projects and discuss the return on investment (ROI) to help you make informed decisions aligned with your financial goals.
How Much Should You Spend on Renovating Your House?
When renovating your home with the intention of selling it for a profit, it’s crucial to focus on renovations that add value to the property. Avoid hyper-specific customizations that may not appeal to a broader home-buying market, as this could result in a lower return on your investment or even decrease the overall market value of your home. Instead, allocate your budget towards renovations that provide the best bang for your buck.
The cost of renovating a home varies based on location, materials used, and the expertise of the labor involved. To gauge your renovation costs, it’s helpful to consider them as a percentage of your home’s value.
Cost for a Complete Remodel
If you plan to remodel your entire home, the renovation costs will be significant. The ROI will depend on the quality of the work and the finishes chosen. Here’s a general guide to estimate renovation costs based on your home’s square footage:
- Light Renovation (e.g., living room, paint, and flooring): $10-$60 per square foot
- Mid-range Renovation (e.g., kitchen, cabinetry, countertops, etc.): $100-$250 per square foot
- Extensive Renovation (e.g., bathroom, teardown, tiling, etc.): $120-$275 per square foot
Breakdown of Costs by Project Type
In terms of ROI, a complete mid-range renovation or even a single project renovation, like a bathroom remodel, can yield a minimum return of 30%-60%. It’s important to note that costs may be 10% to 30% higher in high-cost-of-living (HCOL) areas. However, these numbers are approximate and subject to various factors. They serve as a ballpark estimate to help you set expectations.
Effectively Planning for Your House Renovations: Key Considerations
Pinpoint Your Focus
When planning your home renovations, start by identifying the areas where you want to focus your efforts. While adding a sauna room to your home may be appealing, it might not provide the best return on your investment. Instead, prioritize projects that offer the highest potential for increasing the resale value of your home.
Determine the Quality of Your Renovation
Consider the quality of your renovation work. If your area allows homeowners to use their properties as rentals, opting for rental finishes can help save on overall costs. While adding high-end touches can be tempting, ensure that these expensive finishes align with the preferences and market demands of potential buyers in your area.
Decide whether you will tackle some aspects of the renovation yourself or hire professional help. A mixed approach can be cost-effective, but be careful not to overwhelm yourself with too many tasks.
Set Your Timeline
Home renovations often take longer than anticipated due to factors such as permitting and inspection delays, material availability, labor shortages, errors, and unforeseen problems. To mitigate potential delays, plan ahead. Ensure all materials are on-site before the project begins, book contractors well in advance, and anticipate any potential risks.
How to Save to Renovate Your House
Saving for a home renovation is similar to saving for any substantial expense. Here are some strategies to consider:
Cut Costs
Trim unnecessary household expenses and divert the saved money towards your renovation fund. Consider eliminating or reducing discretionary expenses such as subscriptions, dining out, entertainment, clothing, and grooming.
Increase Your Income
Boost your income by negotiating for a raise, finding a higher-paying job, or taking on side gigs. Direct the additional money towards covering your renovation costs.
Borrow from Yourself
If you have a strategic exit plan for your house, such as selling or cashing out through a refinance, you can consider borrowing from yourself as a temporary solution. Tap into savings or retirement accounts, but ensure you have a clear understanding of renovation costs and how your home’s value will support a profitable exit.
Ways to Finance (or Pay for) Your House Renovations
Several options are available to help finance your home renovations:
Home Equity Loans or Line of Credit
Borrow against the equity in your home through a home equity loan or a home equity line of credit (HELOC). These options function similarly to mortgages, involving closing costs, appraisals, and a lien against your home as collateral.
Construction Loans
Certain financial products specifically cater to renovation needs. Government-backed loans like the FHA 203(k), VA loans (construction to permanent), USDA loans, and the Fannie Mae HomeStyle Renovation loan enable homeowners to fund their home improvement projects.
Personal Loan
Consider obtaining an unsecured personal loan for your renovation. These loans can be used for various purposes, including home renovations. However, bear in mind that interest rates may be higher, and eligibility requirements typically call for good to excellent credit and sufficient income.
Credit Cards
Credit cards can be an option for purchasing materials or covering labor costs during your home renovation. However, due to high-interest rates, it’s crucial to pay off the balance quickly. Consider using a credit card with a 0% APR introductory rate, followed by a manageable regular APR, to minimize interest payments.
Get Prepared and Get It Done
The cost of home renovations varies based on numerous factors, including location and material choices. To eliminate cost uncertainties, obtain estimates from at least three contractors. Request a breakdown of labor and material costs, and inquire about any available discounts. Additionally, review contractor reviews and references to ensure you choose the right person for the job. Armed with accurate information, you can confidently proceed with improving your home.
Frequently Asked Questions (FAQs)
What is more cost-effective, buying or renovating?
Generally, renovating a home you already have is more cost-effective. However, purchasing a home that has already been renovated can be less stressful.
Is it better to move out during a home renovation?
If you have a practical and cost-effective way to move out during a renovation, it can be a good idea. Otherwise, staying in your home during construction can lead to additional expenses, making the renovation more costly.
How do I pay a contractor to renovate my home?
It’s best to have your contractor cover the initial costs of the first phase of the work, such as demolition or framing. Subsequently, make payments as each phase is successfully completed. Avoid paying for work upfront or providing a deposit to protect yourself and ensure the completion of the project.
Remember, renovating your house can be an exciting and rewarding experience. By planning strategically, saving effectively, and making informed financial decisions, you can transform your home while maximizing its value and avoiding unnecessary financial stress. For more personal finance insights, visit Personal Finances Blog.