The True Cost of House Renovations

We all love a good home transformation.

Each year, I get to discuss major house renovations with at least a few of our clients.

If I skip to the end, the final cost and timeline are almost never what was originally estimated.

There’s a reason why HGTV remains popular. You get to see the results of a major project in a 30-minute episode.

But as a financial planner, I get to see the not-so-pleasant side of the project management that the shows skip.

As an example, it took one of our clients over two years to complete the kitchen and bathroom renovations with over $250k in direct costs, excluding taxes.

The amount was certainly much more than expected and the timeline got out of control many times.

Renovations can truly be a major wild card in your financial plan.

Here are some key considerations for you to keep in mind when you contemplate a major house reno.

Reality Gap

Contractors provide estimates based on their desire to earn your business.

The quote you receive when you are about to begin working on the project will almost certainly change by the time you complete it.

To play it safe, consider adding 30% to 50% to your budget and your timeline.

This is not an exaggeration for a major project.

I have never seen a major project finish on time or on budget.

This isn’t that surprising when you are aware of what goes into a renovation though.

For example, old wiring, plumbing issues or work from previous owners can make for unwanted surprises.

And once the walls are open, it’s tempting to fix “just one more thing.”

I’m sure all of you continue to hear about the labor and materials shortages that have persisted since the COVID days.

So I hope it’s clear that the estimate is not likely to reflect reality under most circumstances.

Tax Considerations

Keep every single receipt for your improvements. Don’t skip this step.

Even better, keep everything in electronic format.

These documents are vital for your eventual cost basis calculation.

A higher basis reduces the capital gains tax you owe when you sell the home.

You also need to consider your funding source.

If you plan to use your portfolio funds for the renovations, make sure you understand the tax consequences.

To keep it simple, after three years of above-average market returns, if you sell stocks to pay the contractor, it’s likely that it will trigger a tax bill.

So you are not just paying for a kitchen.

You are also paying an additional 20% to 30% to the IRS.

So be thoughtful when you decide how you’ll fund the project.

The Five-Year Rule

Well, this is not really a “rule” but more of a discussion starter when our clients are considering major renovations.

Are you planning to move in five years or less?

If so, you might want to reconsider a major overhaul.

Renovations rarely increase your home value dollar for dollar.

Most projects only recoup a portion of the cost at resale. I know that kitchens and bathrooms are what sell your house, but you need to understand the big picture.

Have you thought that your personal preferences might even turn off future buyers?

As an example, adding an elevator if you plan to age in your home can actually reduce your house’s attractiveness to families with younger kids.

I’m certainly not suggesting that you don’t make a change to your home!

But simply put, if you won't be there long enough to enjoy it, just know that the math often falls short.

If you think otherwise, please take some time to talk with a good real estate agent to confirm that your investment will actually pay off when you sell.

What does this mean for you?

A major renovation is more than just a home project.

It is a significant financial and even life event if the renovations take multiple years.

It can also have significant impacts on your taxes and your long-term goals.

Before you sign a contract, consider running the numbers to see what it would actually look like in your situation.

Don’t make this decision just based on what you hear on TV or from your friends.

Your home should be a place of joy.

Don’t let a major home renovation take that away.