A: Thinking about home projects can be fun — and scary! If you’re like many homeowners, a big chunk of your wealth is tied up in your house. Making changes, from small upgrades to full-scale home renovations, can have a major impact on your financial situation.
The first thing you should consider is: How long will you live in your house? If you’re planning to stay there until you retire, you can tackle bigger projects like a kitchen remodel. You’ll get to enjoy the finished product longer and don’t have to worry about whether a certain project will appeal to potential buyers.
But if you’re planning to move sooner than that — generally in the next 5 to 10 years — you’ll need to be more conservative. Very often you won’t get the full return on the money you spend renovating. Remodeling magazine has a useful cost versus value tool that shows you the resale boost that you’ll get from common renovation projects.
If you want to make the investment, you need to decide up front how much should you spend. There’s no ironclad rule, but you can get a rough idea by figuring out your home’s value and then dividing that up among the rooms. The kitchen accounts for 10-15% of the total property value, bathrooms are 5-10%, half-baths are 5%, and a finished basement or attic is 10-15%.1 So, if your house is worth $500,000 and you’re remodeling the kitchen, you should consider not spending more than about $75,000.
Keep in mind that the final cost could be higher than the initial estimate. The common guideline for major projects is that they’ll take twice as much time and cost twice as much money. So you don’t want to start a project with a $75,000 budget if that’s all you can spend — chances are you’ll go over your budget.
We would be happy to discuss how funding a home renovation fits in with your overall financial plan — but hopefully this will help you get started. If you’d like to talk to us, please give us a call at 855 488-9536 weekdays 8 a.m. to 5 p.m.
1 The numbers come from the Appraisal Institute, which sets the standards that appraisers use to gauge home values. CNN.com, June 13, 2013.