Making dollars and sense of home renovation plans
Whether you are preparing to put your house on the market or updating a home you just purchased, home renovations can get expensive. The national average spent to remodel a 200-square- foot kitchen is $20, 000, while the national typical to remodel a master bathroom is $18, 000, according to data from Fixr. Costs can vary significantly, though, based on where you live, what rooms you are renovating and your motivation for renovations.
If you’re renovating to upgrade your home, you’ll want to invest in amenities that you can enjoy long term. If you’re renovating to sell a house or perhaps improve an investment property, you’ll need to focus on minimizing costs while increasing value. The expense needs to be balanced against your goals.
Renovations are likely to increase a home’s worth, but you should not always expect to make back its full costs. For example, if you plan to renovate a home now but sell it in 10 or 15 years, the renovations may be outdated, and you’re unlikely to get all of your money back.
Regardless of why you’re renovating, it’s important to keep spending within a range that fits your long-term financial goals. Start by talking with a financial adviser to determine how a renovation fits into your long-term financial plan and understand the best way to cover the costs.
Once you know what you can budget, intend to spend 90 percent of that on the renovations and save a 10 percent cushion for the unexpected. That way, if there is an issue or perhaps if you fall in love with higher-end fixtures – which often happens – you won’t be overspending budget. According to Houzz, nearly half of homeowners (46 percent) struggle to stay on budget during remodeling.
To cover renovation costs, there are a few options. In an ideal scenario, you would have savings to cover at least part of the project, but many homeowners don’t have enough cash to cover everything.
If you have a lot of liquidity in your assets, such as stocks and bonds, you may be able to pull from those properties. In this case, you would be putting the assets into an illiquid asset, so you would want to make sure that you have liquid property remaining.
If you can use existing resources without interfering with your monetary goals, you’ll save on the interest that may come with taking out a loan, but you should also consider how much those assets would earn if they were invested. If you pay between 4 and 5 percent in interest on financing, then you generally would be better off using resources to cover costs since you are likely to break even on growth in a standard, conservative portfolio.
If you don’t have cost savings or liquid assets, there are several financing options. Often, property owners take out loans to cover renovations. And with interest rates at historically low rates, it’s a particularly good time to consider borrowing.
Home-equity lines of credit and home-equity loans allow you to borrow off your house if you have about 20 percent in home equity. If you do remove a loan, be sure that you don’t overborrow. You don’t need to overextend yourself by utilizing financing for refurbishments in a market that may turn.
Under the new tax code, home restorations themselves are not deductible, so, for example, you can’t just write off a new bathroom. However, the interest paid upon home- collateral loans or lines of credit is tax-deductible, and there are deductions available for specific improvements.
If you make medically necessary makeovers, such for example installing entrance ramps or widening hallways, they may be deductible. Or if you are improving energy efficiency with new features such as solar panels, you can take advantage of energy tax credits.
The standard deduction is $12, 000 for individuals and $24, 500 for married couples filing jointly, so if you will be claiming less in total itemized deductions, you are best taking the standard deduction. Consult with a tax advisor to determine if your renovations could be deductible and whether you should itemize them