When trying to figure out how much renovating you can afford, zero-based budgeting is a good way to go. Zero-based budgeting means starting from scratch. Assume all decisions are negotiable.
Start with a list of every renovation expense you can think of, and assign a cost to each individual item. Ideally, it’s best to choose alternative options for each item (e.g., good, better, best versions). Now, rank everything in priority order from “must haves” to “really likes” to “shoot for the moons.” Initially, your list will have several duplicates because of the good, better, and best alternatives. For example, a new stove might appear on your list three times: a $2,000 range that would meet your needs; a $4,000 range that would include extra features; and a $7,000 deluxe model with every feature you’d ever hope to have.
Because I like spreadsheets, I’d create my list in Microsoft Excel. I especially appreciate the “auto-sum” feature: as I edit my list and the associated expenses, I can see the grand total of how much I’m spending as I go.
On the right side of your list, include the dollar figure for expenses in priority order. Only include the dollar figure for one stove. Initially, you’ll include the $2,000 stove, because you must have a stove. Once you’ve included all your “must haves,” you’ll be able to tell whether you can afford to upgrade to “really likes” or “shoot for the moons.” If you’re under budget, don’t immediately start adding upgrades. You should make sure you have about a 20 percent reserve. Chances are good you will spend that reserve, whether it’s for the dry rot you discover after pulling out the cabinets, or the new electrical system you need because your old system won’t support your new appliances.
And, beware of mission creep. I can’t tell you the number of times I’ve done more work than I intended. New linoleum in the bathroom can lead to a new toilet and cabinets because, well, it’s just so much easier to replace those things when the floor is all torn up. If you’re the kind of person who will sometimes spend money to save money, consider a bigger reserve as you budget.
Just to be clear, the renovating I’m referring to is not in preparation to sell your house. I’m talking about renovations you plan to live with and enjoy for years to come. Some renovations are smart financial investments. Others are smart relationship investments. If you have a four-bedroom, one-bath house, you are likely to recoup the costs of adding a bathroom whenever you choose to sell your house. If you have a four-bedroom, two-bath house, and one more bathroom will bring peace and harmony through your children’s teen years, by all means, add a bathroom.
If you’re wondering which renovations will pay off financially, because you’re considering selling your house, you can read my previous article here: http://richardselzer.com/2013/09/03/whats-the-best-way-to-expand-your-square-footage/
If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.