Inside: How to plan and budget for a major home renovation; deciding whether to pay cash or to finance the work; plus how to budget for and calculate cost overruns.
We are well into our first major home renovation in this house. We spent the first five years upgrading all the ‘unseen’ things like heating, electrical and building our outdoor shed. Now that we are tackling the inside, we want to make sure we are being as efficient and effective with our home renovation dollars as possible. Our plan is to pay cash for this entire remodel, so today I’m sharing tips on how to budget for a home renovation.
(If you aren’t ready for a giant renovation, check out how we’ve lived with our small kitchen without doing a renovation in there!)
We’ve already done Phase One of this basement renovation. We hired contractors to dig into the floor of our addition, level the floorboards and add new and improved insulation. It’s already been a game changer in terms of the warmth of the space. I also wrote extensively with some tips for how to hire a contractor for jobs like this.
Calculating the ROI on a Renovation
It’s well known that kitchens and bathrooms sell houses and for this reason, they are great places to spend your renovation dollars. Having said that, they aren’t the only place to spend. Recent data shows that homebuyers are becoming more enamoured with things like storage, outdoor spaces and even laundry rooms.
So there are a couple ways to look at the investment of a renovation. One is the obvious ‘if I spend $x, will I recoup this on the sale of the house?’, but the other way to look at it is from a quality of life standpoint. Not every renovation needs to be done with a sale in mind.
As we renovate our basement, we have no intention of selling or moving for at least five to seven years. We are considering an investment in the basement renovation that works out to about two year’s worth of mortgage payments at our current rate. So instead of asking ‘will we recoup this on the sale of the house’, we are now committed to staying in the house for the additional time it will take to pay down the capital equivalent of the renovation.
It’s easier if I show you with basic, fake math.
Let’s say your mortgage payments are $1000/month, or $12000/year. And of that $1000/month, you’re paying about $400/month in interest and $600/month in principle (or $7200/year).
Now let’s assume you are investing in a renovation that will cost $14,400. That’s the equivalent of two extra years of paying the principle on your mortgage at your current rate ($7200 x 2). So in essence, if you want to justify the cost of the renovation, staying in your home an extra two years would make it a ‘mental wash’. If we stay longer than the additional two years, the costs begin to dramatically decrease.
Sure, you’re paying interest on the mortgage, but you’d be paying that anyway. And the added benefit of having an updated and functional space for two years of life is worth something, right?
Anyway, that’s how we’re thinking about this renovation. From a quality of life standpoint. Though, I have a feeling with all the extra storage and openness we are adding into the house, the overall value will also go up slightly.
How to Budget for a Home Renovation
We did a lot of research in this regard and decided the best way to budget for a renovation is in phases, if at all possible. Because this particular renovation isn’t in a main area of the home, we were able to request four specific quotes for four distinct phases of work. 
The benefit here is we only have to worry about paying for each phase as it happens and don’t need to proceed to the next phase until and unless we have the cash saved up to pay in full. Right now, we are saving up to pay for Phase 2 of our renovation – which will be the most expensive part. We are going to DIY the entire Phase 4 – which will include adding custom planned storage to all the new walls, likely using the Ikea Ivar cabinet system.
If it were a kitchen or a bath, where you want and need the renovation to be completed as quickly as possible, you might consider some of the financing options that give you access to large amounts of funds all at once. Many people will roll the cost of a renovation right into the overall mortgage, so they amortize it over a very long period of time. You can consult a home renovation cost calculator to get a ball park figure of what you’re looking at, but I’m a fan of good old spreadsheets and calculators 🙂
Avoiding and Managing Renovation Cost Overruns
These things happen. And there are two ways you should deal with cost overruns with a major renovation. The first and most obvious way to manage it is to have an additional 10%-15% of the overall renovation budget in liquid cash available at all times. The other way to handle it is to get an extremely detailed quote from the contractor and request budget updates every three to four days. This way, if you are looking at a potential overrun, you will have time to alter the scope of work before it’s done or change course altogether. 
We ran into this with Phase One of our renovation. There was a possibility we were going to have to completely reinforce the outer wall of the home addition. This would have been lengthy and quite involved and it would have taken up the entirety of our Phase One $6000 budget. We still would have done the work, but the timeline for the entire project would have grown and we would have needed to save up for another Phase to get it all done.
Luckily that wasn’t the case and we were able to proceed with Phase One as planned. It actually came in slightly under budget at just over $5,200 after taxes.
It feels like a lot considering the floor is plywood and the walls aren’t insulated yet – but knowing that space has been properly finished and is safe to use makes it all worth it!
