Would you pay home renovation with cash?

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khadijahchi
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Would you pay home renovation with cash?

Post by khadijahchi »

Have been saving up for a home downpayment for 3-4 years, but ended up getting married and moving in with spouse who already owns a home. Now sitting on a pile of cash that is earning 1.X% APY in HYSA and feeling FOMO that this money should be invested instead.

Background:
House is 60 years old, 900 sqft 3 bedroom, 1 bath, semi finished basement and 2 car garage - owe 180k on it, worth about 220-240k. It looks aged and could use updating (kitchen, bath, basement, and can lights are wishlists), but it is in a really good location, transit access, good schools, great neighbors, and our mortgage payment is really low <15% take home income. It's a small and compact house, and I wish it could be styled more like a Japanese/European layout with compact appliances and furnishings. I've never owned a house and have no clue how much it would cost to renovate.

We are thinking of renovating sometime in Spring 2020 (but I think it will be later given that good contractors are probably booked out by now). Last year we talked to one design build contractor who quoted 50k for the kitchen which I thought was too steep given the value of the house. I would expect something like 30k. We will be talking to more contractors in the next month. We haven't even discussed bathroom, but guessing that could cost 15k.

Our income: combined 250k/yr, maxed 401k and roth ira contributions, have set aside separate 6 mo emergency fund.

My question is how to manage cash flow and paying for home renovation. I had saved up 80K earmarked for a downpayment that is no longer needed so i socked away 35k into a CD in the interim. The interest rate keeps going down and the money is just sitting there. Should we instead try to finance the home renovation as we go instead of keeping all this cash for this purpose?

Based on earlier convo with the DBC, payment is not due upfront but broken into partial payments so its possible we can dip into savings (~10K) and then pay as we go with extra money from monthly income that would have otherwise gone to savings anyway. Or get a 0% credit card line of credit that we can easily pay off in a year. I'm asking this because I'm nervous about having so much money in cash that I feel could have grown much more, particularly over the past year.

Does anybody have any advice either the cash management or home reno situation. thanks
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CAsage
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Re: Would you pay home renovation with cash?

Post by CAsage »

I will note that the expense of remodeling depends a great deal on materials (lots of variation in quality, pricing stable geographically) and labor (very regional and demand based). It has nothing to do with the value of your house, but more with the value of "new" or aspirational local housing. Take your time, there are lots of good threads on this site about remodeling bids and planning. I would keep the money in a decent savings account or a very short term bond fund, and pay as you go. Match the investment to the need, no point in going into debt. 900 sf is cozy.
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mortfree
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Re: Would you pay home renovation with cash?

Post by mortfree »

Have you been added to the deed?
Carefreeap
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Re: Would you pay home renovation with cash?

Post by Carefreeap »

You are going to be hard pressed to get a decent rate on a cash-out refi. Generally you can only borrow up to 80% loan to value. You might be able to get a HELOC but those are usually variable rate loans. Therefore cash is probably the only option you have.

Personally we've only paid for renovations with cash. Most kitchen and bath remodels only have a lifespan of 10 years before they are considered "dated" again.

Take your time to find the right contractor. For design, we were very happy using a local kitchen and bath cabinet store.

Sounds like you've got a great spot. Good luck with your project!
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Trader Joe
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Re: Would you pay home renovation with cash?

Post by Trader Joe »

khadijahchi wrote: Tue Dec 31, 2019 7:05 pm Have been saving up for a home downpayment for 3-4 years, but ended up getting married and moving in with spouse who already owns a home. Now sitting on a pile of cash that is earning 1.X% APY in HYSA and feeling FOMO that this money should be invested instead.

Background:
House is 60 years old, 900 sqft 3 bedroom, 1 bath, semi finished basement and 2 car garage - owe 180k on it, worth about 220-240k. It looks aged and could use updating (kitchen, bath, basement, and can lights are wishlists), but it is in a really good location, transit access, good schools, great neighbors, and our mortgage payment is really low <15% take home income. It's a small and compact house, and I wish it could be styled more like a Japanese/European layout with compact appliances and furnishings. I've never owned a house and have no clue how much it would cost to renovate.

We are thinking of renovating sometime in Spring 2020 (but I think it will be later given that good contractors are probably booked out by now). Last year we talked to one design build contractor who quoted 50k for the kitchen which I thought was too steep given the value of the house. I would expect something like 30k. We will be talking to more contractors in the next month. We haven't even discussed bathroom, but guessing that could cost 15k.

Our income: combined 250k/yr, maxed 401k and roth ira contributions, have set aside separate 6 mo emergency fund.

My question is how to manage cash flow and paying for home renovation. I had saved up 80K earmarked for a downpayment that is no longer needed so i socked away 35k into a CD in the interim. The interest rate keeps going down and the money is just sitting there. Should we instead try to finance the home renovation as we go instead of keeping all this cash for this purpose?

Based on earlier convo with the DBC, payment is not due upfront but broken into partial payments so its possible we can dip into savings (~10K) and then pay as we go with extra money from monthly income that would have otherwise gone to savings anyway. Or get a 0% credit card line of credit that we can easily pay off in a year. I'm asking this because I'm nervous about having so much money in cash that I feel could have grown much more, particularly over the past year.

Does anybody have any advice either the cash management or home reno situation. thanks
No, I try to avoid paying for anything with cash - just in case.
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GerryL
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Re: Would you pay home renovation with cash?

Post by GerryL »

I paid for my remodel/refresh (>$55k) with cash. That included selling some stock, of which I had too much, anyway. Never occurred to me to take out a loan if I could afford to pay for it with money I had.

If I had worked with a larger contractor, they would have gotten all the materials before starting. But I chose to work a small general contractor, so sometimes there were delays in getting material while the work was underway. This at least once caused a wrinkle in the agreed upon payment schedule, not to mention the completion date.
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Watty
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Re: Would you pay home renovation with cash?

Post by Watty »

khadijahchi wrote: Tue Dec 31, 2019 7:05 pm Does anybody have any advice either the cash management or home reno situation.
khadijahchi wrote: Tue Dec 31, 2019 7:05 pm House is 60 years old, 900 sqft ......

worth about 220-240k.
A big risk is that you could end up putting $50K into it and you would still have a tiny 60 year old house that is still worth about the same amount since you would not be adding square footage to it. Be sure to talk to a real estate agent to make sure that what you are doing is appropriate for your neighborhood.

Are you planning to have kids? 900 square feet and one bathroom may be doable for a couple but if you have kids you will likely want to move to a larger house since you can afford it with your income. It might not make sense to do a lot of remodeling if you will move in a few years. Don't kid yourself, you will want a larger place if you have a kid.

You will need to move out of the house while it is being remodeled. You will also likely want to also refresh the rest of the house by doing things like refinishing the floors and putting in new windows. It is also likely that you will need to have major work done on the electric and plumbing systems. Be sure to budget for all the things like that.

Don't underestimate how stressful the remodel will be on you and your spouse. There is an old joke about building custom home which would be similar. "The final step in building a custom home is to file the for divorce." :D When doing the remodel be sure to have lots of communication and patience with your spouse, also remember that in the long term it does not matter if the drawer knobs have squiggles or swirly designs. There will be a tendency for both of you to hyperfocus on the details.
khadijahchi wrote: Tue Dec 31, 2019 7:05 pm I wish it could be styled more like a Japanese/European layout with compact appliances and furnishings
I could be mistaken but it sounds like it is a 1960s post WWII building boom tract home. The type they wrote the "ticky tacky" song about. If so "It is what it is" even if it is in a great location. Even though they may transform houses on TV shows that is not something that is realistic to try doing yourself.

If you want a different type of house then you should buy a different house.
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Cubicle
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Re: Would you pay home renovation with cash?

Post by Cubicle »

I'd recommend putting the funds into a money market, like the Vanguard Federal or Prime funds. (I think those are the names.) But something relatively stable, low volatility, high liquidity. Pay for the renovations as per the contracted schedule, (1/4, 1/3, etc...) if you can from your income, dip into the money market as needed. Don't borrow to pay for the renovations unless it's an absurdly low interest rate.

If you plan on staying in the house long term, I would not factor the cost of the renovation into a higher future selling price. I don't view primary residences as investments. They are tools like a power saw or drill. I expect to get zero money out of my home personally;I hope to at least break even. If you want/need something will get use out of it, & will make you happy, then you should spend the money as if you will not recoup what you paid. Within reason of course, don't drop thousands of dollars for 24 karat toilets (unless that's what you really, really, want...).
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thursdaysd
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Re: Would you pay home renovation with cash?

Post by thursdaysd »

I paid cash for mine - 40K on a (now) 300K house. I had an interior designer who was not cheap but worth every cent as she picked the contractors and rode herd on the whole exercise.

As said above, be prepared for major disruption. I moved out of the house part of the time, and since I replaced all the flooring every single thing in the house had to be boxed and moved.

Unless you know for sure that it will improve the resale value of the house, or that you plan to live there for a number of years, I can't think it would be worth the cost and the hassle for this house.
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Tamarind
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Re: Would you pay home renovation with cash?

Post by Tamarind »

I'm saving for a major reno that I intend to pay for partly in cash and partly with a HELOC. I think this "surprise" cash would be well used for a reno with two caveats.

1) Don't spend your money on a kitchen you don't own. Unless you are on the deed you don't own the kitchen.

2) Renovation costs don't scale evenly with home value, especially if what you want are high-end finishes and/or major changes to layout. A smaller kitchen has less area so smaller areas for tile, counter, etc, but an appliance costs what it costs. Home value is likely to be capped by size and location no matter how nice the kitchen and bath. This means it's possible with a small home to spend much much more on the reno than you can ever get back, even more so than with an average sized home.

I'm in the same boat with my home, and haven't decided whether to drastically reno or fix it up for sale and find a home that's a better fit for our odd tastes. Think long and hard about whether you will stay there for multiple decades before putting a Japanese/European twist on a sub-1000sqft home, especially if you're not in a location where even small homes go for a lot.
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khadijahchi
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Re: Would you pay home renovation with cash?

Post by khadijahchi »

Thanks for all who responded. This has given me a couple of things to think about.

1. Have not been added to deed. Do i/we need a lawyer to get this done? How much would it cost? I think he had cited cost as a reason against this and assured me that if we sell this house the proceeds would go into buying a new house which we would own together. May need another discussion about this.
2. Seems like paying cash is the way to go. Will keep in HYSA for now
3. great point on the cost of reno not being proportional to house value. keeping that in mind, we are simple people. I've rented over the past 20 years from one apartment to another, each was not perfect and had various issues large and small. I don't have expectations of a "dream home". Would be nice to have a dishwasher. All our other appliances are new or <5 yo. We would not be upgrading appliances other than installing dishwasher.
4. What is a boom tract home?
Watty wrote: Tue Dec 31, 2019 8:54 pm
I could be mistaken but it sounds like it is a 1960s post WWII building boom tract home. The type they wrote the "ticky tacky" song about. If so "It is what it is" even if it is in a great location. Even though they may transform houses on TV shows that is not something that is realistic to try doing yourself.

If you want a different type of house then you should buy a different house.
5. We haven't even considered buying a different house. It fits our needs right now, and below our means the mortgage is so negligible, tax is low on a small house, its like living rent free (almost). We talked about living in this house for the next 5-10 years.

6. Kids: We want them, but have not considered 1 or 2. I am on the older side so if luck is against us, we may not even be able to get pregnant. I think if we have no kids or 1 kid, the house should be fine as is. If we have 2 kids, it may get cramped. The elder lady who used to own the house raised 3 kids in there. I also have siblings who live in Japan, one with a kid, they live in much smaller quarters. I understand that things and lifestyle in America is different. TV's and cars are bigger, bigger refrigerators, tables, armchairs, entryways have a console and coat hangers, kitchens have 6 burner stoves and huge islands, formal dining rooms with a china hutch. It wasn't always like this I think sqft of American houses have increased. So maybe waiting, 10 years from now we will know for sure what lifestyle we need, we will finalize number of kids we have (0,1 or 2). And 10 yrs from now is probably a better time to look into buying a new house or not.

Thanks again for all the opinions. Will take all these back to the spouse.
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Watty
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Re: Would you pay home renovation with cash?

Post by Watty »

khadijahchi wrote: Thu Jan 02, 2020 1:43 pm 4. What is a boom tract home?
During the great depression of the 1930s and WWII in the 1940s there was very little new home construction that went on either because of the depression or material and labor shortages through and after the war.

By the late 1940s several factors came together.

1) Few new homes had been built in almost 20 years so there was a backlog of demand.

2) The automobile came of age and having people commute to their jobs by car because possible. Before the automobile the suburbs as we know them basically did not exist.

3) People had been delaying getting married and starting the families because of the great depression and WWII. This resulted in the baby boom and a lot of additional demand for new housing.

4) Many veterans of WWII could also get low cost home financing through programs like VA loans. The easy financing increased the percentage of home ownership.

5) Modern factory mass production techniques were applied to building homes at a fast pace and low cost. This allowed lower skilled workers to do home construction and sometimes the quality and design was not the best.

One distinction is that in the 1920s or before many homes were very well made even if they were not large or fancy so it may make sense to do a lot of renovation for them. This tends to be much less true of houses built during the post WWII building boom which went on at least into the 1960s.

There have been documentaries these that you can look up and one of the first and most famous was Levittown but using it as an example is problematic since it was a more widespread phenomena and often not nearly so well organized. In addition to the quality of the building there were often also lots of other issues with strict segregation not only by race but also religion and national origin.
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Bernard
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Re: Would you pay home renovation with cash?

Post by Bernard »

I've bought a house in 2017 and have since renovated non-stop. In my experience, paying "cash" for work got me a 30% to 50% discount on labor, literally tens of thousands of dollars in my case. Since I can't deduct home remodel cost from my taxes, I think that's a return far better than putting it somewhere else.
Cash is king.
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Re: Would you pay home renovation with cash?

Post by abuss368 »

Not sure here. Interest rates are so low that may be a better route and pay down over time.
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onourway
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Re: Would you pay home renovation with cash?

Post by onourway »

Bernard wrote: Thu Jan 02, 2020 8:52 pm I've bought a house in 2017 and have since renovated non-stop. In my experience, paying "cash" for work got me a 30% to 50% discount on labor, literally tens of thousands of dollars in my case. Since I can't deduct home remodel cost from my taxes, I think that's a return far better than putting it somewhere else.
Cash is king.
What does ‘paying cash’ in this case even mean? If you get a loan the funds are simply deposited in your account and from the contractor’s point of view they have no idea where the money is coming from. Few contractors I’ve ever worked with accept credit cards, and I can’t imagine more than a 5% or so discount if they did.
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Re: Would you pay home renovation with cash?

Post by onourway »

khadijahchi wrote: Thu Jan 02, 2020 1:43 pm Thanks for all who responded. This has given me a couple of things to think about.

1. Have not been added to deed. Do i/we need a lawyer to get this done? How much would it cost? I think he had cited cost as a reason against this and assured me that if we sell this house the proceeds would go into buying a new house which we would own together. May need another discussion about this.
2. Seems like paying cash is the way to go. Will keep in HYSA for now
3. great point on the cost of reno not being proportional to house value. keeping that in mind, we are simple people. I've rented over the past 20 years from one apartment to another, each was not perfect and had various issues large and small. I don't have expectations of a "dream home". Would be nice to have a dishwasher. All our other appliances are new or <5 yo. We would not be upgrading appliances other than installing dishwasher.
4. What is a boom tract home?
Watty wrote: Tue Dec 31, 2019 8:54 pm
I could be mistaken but it sounds like it is a 1960s post WWII building boom tract home. The type they wrote the "ticky tacky" song about. If so "It is what it is" even if it is in a great location. Even though they may transform houses on TV shows that is not something that is realistic to try doing yourself.

If you want a different type of house then you should buy a different house.
5. We haven't even considered buying a different house. It fits our needs right now, and below our means the mortgage is so negligible, tax is low on a small house, its like living rent free (almost). We talked about living in this house for the next 5-10 years.

6. Kids: We want them, but have not considered 1 or 2. I am on the older side so if luck is against us, we may not even be able to get pregnant. I think if we have no kids or 1 kid, the house should be fine as is. If we have 2 kids, it may get cramped. The elder lady who used to own the house raised 3 kids in there. I also have siblings who live in Japan, one with a kid, they live in much smaller quarters. I understand that things and lifestyle in America is different. TV's and cars are bigger, bigger refrigerators, tables, armchairs, entryways have a console and coat hangers, kitchens have 6 burner stoves and huge islands, formal dining rooms with a china hutch. It wasn't always like this I think sqft of American houses have increased. So maybe waiting, 10 years from now we will know for sure what lifestyle we need, we will finalize number of kids we have (0,1 or 2). And 10 yrs from now is probably a better time to look into buying a new house or not.

Thanks again for all the opinions. Will take all these back to the spouse.
You want to be added to the deed before you do this. Don’t take the word of someone you are in a relationship with. I’ve seen this end badly - one friend is going through it right now. Things change when relationships end.

Your house and situation sounds similar to ours. Our home is similar age, similar size, and we’ve done extensive remodels over and above what the house is ‘actually worth’. We are now raising 3 kids here. It’s tight and there are definite downsides, but the house is solid, very low cost, has a great neighborhood, great character, too many positives to want to make a change. If you like the house and its location, spend the money to make it how you want it, don’t let resale value factor much into your decisions - that’s a small part of the overall picture.
dsmil
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Re: Would you pay home renovation with cash?

Post by dsmil »

We just did the 0% credit card offer route while renovating two bathrooms. We'll pay it in 15 months, will earn credit card points, and will earn some interest on the money for the time being.
SevenBridgesRoad
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Re: Would you pay home renovation with cash?

Post by SevenBridgesRoad »

Yes.
This isn't that complicated. Pay cash for remodeling. Keep it simple.
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