Aug 11, 2013

Remodeling a House - The Budget

Good News. We found the perfect house.

Bad News.  It has green, shag carpeting... everywhere.

It's almost impossible to find the perfect house in an old neighborhood, unless of course you're willing to overpay. Even if you are willing to overpay the house still won't be exactly how you want or need it.

My wife and I just bought a house in an old neighborhood and it needed a lot of work. But we had a great realtor and a great contractor.

We wanted to be in a desirable neighborhood that had a solid history of holding property value. We also wanted to be in a young neighborhood with a lot of kids. We gave our realtor our budget and told her to keep an eye out.

When we found a house we wanted to make an offer we invited our contractor to walk through the property with us. We gave him a sense of what we wanted to do and he would provide a ballpark estimate on what it would cost. The equation is simple.

We ended up buying a house for $230,000 and my wife made a list of what she wanted done. I would live in a one bedroom apartment with a futon and TV so it only made sense to let her take point.

We knew the maximum home value in our neighborhood for an updated house our size was $348,000 (see how I got to this number here). So we knew we had a maximum renovation budget of $118,000.

My wife gave our contractor a list of items she wanted done and he provided costs for each item. His costs included the cost of updated electrical and plumbing. The inspection showed that our heating, A/C and hot water tank were updated, which saved us $3,000 - $5,000. However they found that we needed radon remediation in the basement due to the age of the house. Again, this is why a great contractor is so important because the average person has no idea what needs to be done.

Current Projects
Floors - $4,665
Interior Paint - $6,000
Exterior Paint - $900
Kitchen & 1/2 Bath - $41,000 (includes $6,000 allowance for appliances)
Full Bath - $14,500
Doors - $5,500
Fireplace - $1,200 ($4,100 if we included built-in book shelves)
Finish Basement - $5,580
Shutters - $200
Radon Remediation - $1,075
Electrical Box - $500
Roof - Paid for by seller through homeowners policy (hail damage)
Total Costs - $81,120

We decided to focus mostly on the interior of the house first so we could move in as soon as possible. Plus it makes the interior work easier because there are less projects going on at the house. According to my math we still have $36,880 left for the outside and other projects. Our hope is that we can finish under budget so that we have more equity in the home.

Future Projects
Garage Door
New Front Windows
Front Patio
Back Patio
Total Budget Left - $36,880

It's important to be thoughtful when renovating an old house because you don't want to overspend. If you pay too much for the house and too much on remodeling projects you'll never get your money out when you sell or refinance.

Everyone has different tastes and preferences but as long as you stick to the formula and stay under Market Value you won't lose any of your investment. That is of course assuming the housing market doesn't crash again!