Apr 022012
 

If you start to look for information on how to budget for a home renovation, you will come across a lot of tips for “renovating on a budget.” These can be very helpful since they will steer you in the right direction to get your materials for the best price and get the best value for your money. You will also find estimates on what a bathroom renovation will cost and how to get estimates from a contractor.

Yet, they all presume you know your budget already. Yet, how much you can spend is not dependent on how you spend it. So, before you start to feel overwhelmed and aren’t sure where to go next, it may help to take a step back and think of a home renovation as buying a small home. You will find that many of the same principles apply.

When you are looking to purchase a house, the biggest factor in budgeting is how much home can you afford? Before you start looking at neighborhoods and kitchen layouts, you need to know how much money you can spend. The same is true for home renovations. How much you can afford for a renovation will be determined by a few things.

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How much savings to you have? This is equivalent to a down payment. The more you can contribute to the project without borrowing, the less you have to borrow. Therefore, the less you will spend in interest.

Ideally, you would be able to pay for your renovation 100% from savings, but that is usually not the case. Also, financial advisers will strongly encourage you to be sure that you have an emergency fund before contemplating any renovation. A lender won’t force you to have one, but you should give it serious consideration if you don’t already have an emergency fund. Savings above the amount of your emergency fund are then available for a renovation.

How much can you afford to borrow? When you go to the bank they will look at refinance options, or home equity loans, and calculate how much they are willing to loan you based on how much they think you can afford. They will base this on income and debt. They will only look at the numbers though. They won’t take into account a bigger piece of the puzzle – how much you can really afford.

Just because a bank says that you can afford to spend $X a month on a home equity loan, doesn’t mean you can afford that. Do you think you can find that money month after month? Or does that amount feel like it will be a struggle? Remember that the bank’s calculations don’t include how much you spend on dining out, toys for your children, or food for you pets. They will arrive at a number that will work for them. You have to be sure that the number works for you as well.

You can use online calculators to get an idea of monthly payments depending on amount of loan and interest rate to get an idea of what a bank can offer. Bankrate.com has one.

How much should you spend? When shopping for a home, you will look at how much homes in your area recently sold for. You will able to get an idea of what a home with the features you want will cost. When shopping for renovations, you need to keep the same ideas in mind. You will get some return on your investment in renovations. That return will depend heavily on how much you put in, what the price of a home is that includes upgrades you don’t yet have, and the length of time you will be in your home.

As part of determining your budget, it’s a good idea to consult a real estate agent in your area to find out what homes are worth in your neighborhood. Did the neighbor down the street just sell his home? Did he have an updated bathroom with a walk in shower? How much did he sell for over what your house would sell for without an upgrade? That’s how much your upgrade will improve the value of your home.

If that number is less than what you can comfortably afford, then seriously consider how much you want to put in. If you over improve your home, then you will lose money.

On the other hand, if that value is more than what you can spend, then you are almost guaranteed to get a 100% return on investment. Unfortunately, that usually isn’t the case in today’s market. Remodeling Magazine does a report every year on cost vs. value for remodels. Their Cost vs. Value 2010-11 report was released recently and the values aren’t as high as they were last year; they have actually been falling for a few years. The 2010-2011 report puts an upscale bathroom remodel at a 57.2% return. A moderate bathroom renovation is better at 64.1%, but not by much.

But, again, this is just looking at money. If you need to do a renovation, such as for accessibility, then this may not weigh as heavily in your decision making. Also, if you feel that the money is well spent for your piece of mind, then spending extra may be a good idea.

If you are planning on staying in your home for many years, you will most likely get a larger return on your investment. In general, housing prices rise, so your home will rise in value as well. If you are planning on moving within the next 5 years, then looking at return on your investment should be a priority. If you plan on staying more than 5 years, then this won’t factor in as much as will what you feel comfortable spending to make the home comfortable for you.

After you know the total amount you have to work with, then comes how to allocate that budget. The biggest chunk of your budget will be for labor; about 1/3. Also, you want to make sure that you include a padding of 10% for unexpected expenses. 

At this point, if you find that what you would like in your bathroom renovation will cost more than you have to spend, it’s time to turn to renovating on a budget. Now that you know what you can spend, and have an idea of what various materials cost, you will be able to spot a deal easily.

Remodeling is a big undertaking – and the larger the renovation, the more money you will need. However, you can still get a handle on a budget for your renovation easily. By taking time, and doing some research, you will arrive at the best budget for you. Don’t be afraid to search online for information, but know that you will probably need to enlist the help of a local real estate agent or bank.

References:

Plan Your Total Bathroom Remodel Budget

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