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Ever since I announced our plans for the new house, I’ve been bombarded with questions about finances. How do you budget for a renovation? How do you know how much to save? How much does all of this cost? What’s your total renovation budget? These are all great questions, yet tricky ones…because it isn’t exactly fun to share the details of your finances with the entire world.
But sharing prices for home projects is really helpful for others who are considering tackling some of these same projects. I always love when other bloggers actually share numbers, because it’s helpful to know if I can afford to do something similar in my own house!
I’m lucky that Finn is a finance whiz and he has handled the money side for our new house. He looked at lots of options as we purchased and decided on our home and renovation budget, so I figure he is the best one to share the scoop. Take it away, Finn…
Figuring Out Your Home Buying Budget
When we officially decided it was time to move on from our condo and find a single family home in Chicago, we were faced with a variety of decisions we had to make even before the house hunting began — budget being the biggest one.
It is important to set your budget before you begin your home buying process because it gives you a realistic basis for the type of home you can afford and ensures you will not end up “house poor.” This is much easier said than done as you need to estimate how much your home will sell for, the type of property you want to buy, potential immediate improvements to the new property, financing, etc. It is important to understand that every person has a different financial situation, so there is no one perfect answer to this. Planning and understanding what YOU are comfortable with will always ensure the best outcome for you and your family!
When you are getting started, you need to understand the major financial variables and accurately plan these out since they create your final budget. That way, you can move on from the boring numbers and go to those open houses filled with financial confidence and a plan of attack!
How Liquid Are You?
Liquid = how much cash you have in the bank and can access on short notice.
In the case of home buying, liquidity will eventually determine how much you are able to spend on a down payment and/or immediate projects for the new property. It is crucial to understand your current assets and available cash, both before and after you sell your current home, so you can estimate the impact of the sale price on your future budget. Discuss with your realtor and ask for a CMA (Competitive Market Analysis), which breaks down similar home sales in your area and provides guidance on the potential listing price for your home. Adjusting for the current market and the condition of your home, you can give yourself a realistic expectation as to what your home will sell for once you list it.
Keep in mind when selling a home, you will have to settle any outstanding mortgages on that home, potentially pay agent commission fees (on average 4-5%), and of course, there are always charges and items you will never see or understand at closing (seriously, why does it cost so much to move a title?!). To quantify these added costs, assume 10% of your selling price will be handed right back over in fees, prorated payments, and sales commission.
If this is getting confusing, here is a quick example to help clarify how much money you’ll walk away with after selling your home:
Sell your home for $300,000 with an existing $200,000 mortgage balance:
- Sales Price = $300,000
- Mortgage = ($200,000)
- Selling Costs = ($30,000) – Remember 10% of the purchase price to cover all the additional costs
- Profit = $70,000
While every situation is different (and your mortgage balance obviously impacts the amount you will get back), this is a good visualization of how $300k can quickly turn into $70k.
Determine Budget and Type of Home
There are so many types of homes out there and defining the condition of the house you want to buy impacts the price range and budgeting options. Are you looking for new construction or recently refurbished home, resulting in a higher price point? Are you looking for a mid-level fixer-upper? Or, are you crazy enough to take on a major renovation (raises hand…regrets raising hand…realizes it’s too late….shit)? All of these require a different financing model and purchase price budget, so it is important to figure this out from the start. 
We had to work through this ourselves, since we were looking for something to renovate, even though we were at first drawn to nicer, finished homes. We would see a house and get excited that maybe this was our Goldilocks home, but then we would get there and realize they had just upgraded the entire kitchen, so we would sheepishly smile and slink out, knowing we had to keep looking. We did not want to pay extra for recent upgrades since we would be gutting it anyway, so we had to be patient and use Casey’s vision of a future home to help us find the ideal house (and I’m so happy we found it!).
If there is a lot of work to do on a potential home, I would advise lowering your total purchase price budget and keeping cash in order to do renovations. If you are able to find a less expensive home and do the work yourself, there could be a larger payoff in the end when you sell it. We ended up lowering our target price point by about $100k when I realized what Casey was planning to do, and we shifted our attention from finding a dream location in Wicker Park to finding the best value we could in a solid location. To be honest, we were stretching our means anyway, and this is why it is important to sit down and figure out all of the numbers. Otherwise, you may eventually keep raising your budget and making exceptions only to find yourself very, very far from where your budget started.
How Much Do I Put Down?
If you are targeting a renovation on a less than perfect home, you have a few things working in your favor. You can start your bidding lower and put less money down, knowing there is most likely less competition for the property. This frees up liquid cash for the renovation and hopefully, allows you to negotiate the price down. We knew pretty quickly that the work we wanted to do was going to call for a $50k+ renovation cost and this was something we had to take into account when determining our initial offer. We actually ended up only putting 10% down and staying more liquid so we would have an easier time funding the renovation in the short-term.
If you are buying a home in very good condition with minimal changes needed, most of your budgeted cash will go towards the down payment and you can plan accordingly. In this case, you may want to put down 20% to avoid any mortgage insurance. This was my initial goal when we started the process (before Casey tricked me into a MAJOR RENOVATION!) Also know that financing can play a role in determining which buyer has the strongest offer on a property. An offer with a higher down payment is generally seen as stronger and more favorable to the sellers.
There are a wide range of financial instruments you can utilize to achieve your goal of an affordable mortgage for your dream home, but I would suggest you discuss these with your lender, as every state and company has different guidelines and offers. As a rule of thumb, always determine what the final mortgage payment would be in each and every scenario. This will let you know if you are taking on too much or if you think you can afford the new mortgage and potential renovation.
Renovation Budget – Breakdown
Assuming you want to go the route of immediate work and hiring a contractor, it is very important you do a few things. First, shop around or work with someone you really trust. This post outlines some tips to find and work with a contractor.
If you have a contractor lined up, bring him or her to the house and discuss your plans BEFORE you put in an offer. That way you understand if these things are affordable and more importantly possible before you commit to the renovation plan. Casey did this for us and it was a great idea because it allowed us to openly discuss plans and solutions and get a rough estimate of costs before we were the owners.
We had our contractor break down every single task so we knew exactly what was going into that final number. This was helpful as we decided on the final list of what we wanted him to accomplish in the house. We tried our best to pare down, when possible, in order to save a few bucks, but ultimately, we wanted to do as much as we could in this first phase of construction.
You should take the following numbers with a grain of salt because they’re likely to be different for your particular home. Every town is different and prices can vary greatly. Plus, you just never know what you’re going to find when you open up those walls. Here’s a rough look at our renovation budget for our Finn Fixer Upper. This includes labor and materials.
- Flooring ($25k ): This includes removing all old hardwood and carpet, as well as disposing of the materials ($5k), repairing subfloor and laying new hardwoods ($8k). It also includes the cost of the hardwood for the entire home, totaling 2,200 square feet ($12k.) Remember, the type of wood you choose and the install can vary greatly. By using Stuga floors, our install costs are lower than average. However, keep in mind that not all floors need to be replaced. Most can actually be stripped and resurfaced at a much lower cost. We did that in our first home and you can read about it here.
- Millwork ($25k ): This includes removal of all baseboards, casings, and doors as well as the installation of new materials for the entire home. This may seem like a lot until you realize this includes every single baseboard, every single door frame and window frame, as well as the installation of 20+ new high-quality wood doors. This is a major part of the renovation and while it may not seem exciting, changing all of the millwork will update the entire quality of your surroundings.
- Electrical ($13k ): This includes upgrading every outlet and switch, removing old fixtures, and adding recessed cans throughout both levels. This also includes running Ethernet, speaker wire, HDMI, etc. throughout the home and installing ceiling speakers (check back for the Smart Home series coming on all this fun tech stuff!). Installing recessed lighting and ceiling work is a major upgrade to the space and improves the open layout of the home, so we felt this was worth the price of about $200/can.
- Paint ($12k): This includes painting ceilings, walls, millwork, doors, and windows as well as patching and prepping walls. This also includes the paint ($2,500 or $60/gallon) for the entire home.
- Demo ($11k ): This includes removing walls on the first level, removing the fireplace, and adding in new beams for support. It also includes the laundry room and closet upgrades. Changing the layout of our home was actually less expensive than I expected but the other stuff (MILLWORK!) was not.
Plan for the Unexpected
With any project, you need to plan for things to go wrong. This is especially true when you’re renovating a 100-year-old house. We’ve already run into some surprises when we opened up the walls and floors…you just never know what you’re going to find! So, I think it’s important to set aside an extra 10-20% of your renovation budget in case things go wrong. Better to be safe than sorry!
Our Long-Term Investment
This isn’t our forever home and we’re hopeful that the money and work we’re putting into the space will be worth it in the long-run. It is important to keep in mind that we are investing in our own daily quality of life, as well as trying to cultivate a home we are proud of and love spending time in. As we moved out of our old home, I remember Casey saying, “Why did we wait three years to makeover the fireplace?!” It was that thinking that inspired us to dive headfirst into this renovation and try to balance the budget with the dream.
I hope this provides a bit of clarity on how we bought our Finn Fixer Upper. If you have any questions, be sure to ask in the comments below and I’ll do my best to answer!
Finn
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