August 16, 2023

 

(CRUNCHING THE NUMBERS ON HOUSE RENOVATIONS)

August 16, 2023

Hello everyone,

Has anyone ever bought a fixer-upper house? Did you flip it?

Are you looking to buy your first home?

Are you thinking of buying a fixer-upper house as an investment and a long-term hold?

So, how much do you think you should put into it?

Let’s do some numbers.

If you need a mortgage, then the size of the mortgage should be no larger than three times your annual salary. So, if the household makes $150k per year, then it is probably not a good idea to shop for houses that sell for more than $450k.

The monthly mortgage payments should stay under 28% of your gross monthly income. Let’s say you make $5k per month (before taxes), then your monthly mortgage should not be more than $1400.

You should then be looking for a home that needs renovating for less than the difference to your budget. So, if $400,000 is a hard budget, then you would be looking for a $350,000 house that needs $50,000 in renovations.

How much should I renovate?

As a person who has done renovations on a home, I can tell you that estimates and actual costs rarely match. That’s why it is vitally important to leave room in your budget for all the surprises that will inevitably appear.

If the house is in a great position, but the problems will be extremely costly to repair, you should probably pass. For example, problems with foundations, an outdated electrical system, a broken plumbing system, or a leaky roof are kinds of repairs that can lead to a more costly and time-consuming situation where you don’t see the yield on that return on the sale as opposed to redoing the kitchen, redoing the bathrooms, and just painting the house and doing aesthetic items. Generally, owners and buyers are willing to pay a premium for the aesthetic items as opposed to those structural items that keep the house running and from falling apart. When I renovated my house, I concentrated on the kitchen(s) and the living area and the bathrooms. I also had the house painted. Before I started renovating, the walls in the kitchen were painted yellow and every bedroom had different coloured walls. The kitchen floor was linoleum with a very bright pattern. So, I had that ripped out and replaced it with board floors.

Is this house going to be your home or is it an investment property?

Be careful how much you put into any home, whether it is your own or an investment property. If it is your home and you intend on staying there for decades, then the pot of funds you spend on the property can be a little larger than average. If it is an investment property, be very mindful of how much you spend and where in the house those funds are directed. It is also important to think about the area where the house is situated. What are the re-sale prices in the neighbourhood? If you put more into a house than the median sales values are, you will have trouble selling the property. It is probably a good rule of thumb not to renovate a fixer-upper above 10-12% of the median sales price in your area. However, if you are patient, some renovations will prove beneficial when it comes time to sell. Kitchens and bathrooms should always be the first areas you renovate as they are the first areas a prospective buyer looks at.

Financing your home renovations

The best home improvement loans (U.S.)

Best overall: LightStream Personal Loans

Best for borrowing smaller amounts: PenFed Personal Loans

Best for lower credit scores: Upstart Personal Loans

Best for long repayment terms: SoFi Personal Loans

Best for fast funding: Discover Personal Loans

Enjoy the home improvement journey. Expect hiccups and take them in your stride. It will all be worth it in the end.

Cheers,

Jacquie