Home remodeling tempting, but not always wise move

Anyone working from home during the pandemic has probably become hyper-aware of the numerous imperfections in their home, and the urge to remodel, fix, furnish and generally gussy up is absolutely real.

The issue is that the timing isn't great, with the prices of building materials up to two to three times what they were a year ago. Instead of hiring someone to frame up a second office, we should instead reframe our decision to remodel at this very moment.

But first, true confession: I want to remodel so badly now. The general damage from a whole covid-induced spring and summer of the kids in our house at all times is real. My little ones figured out how to deftly and patiently peel the "leather" off our living room chairs, our "white" couch is, well, not that color anymore, there is a mysterious hole in the wall behind the "timeout chair," and we surrendered the coffee table to the 4-year-old as a coloring table in a desperate attempt to entertain her while we navigated virtual school for her big brothers. And, people, that is just the living room.

Since we took up a new hobby in the pandemic called, um, cooking, I became convinced that our older-model oven was not cooking to the right temperature. After several weeks of putting the theory out there for consideration (also known as nagging) that we needed a new oven, my husband purchased a small thermometer to test out the cooking temp. I am sad to say that it definitively proved the cooking problem was not the oven.

I have written about the importance of a savings account, called a home repair reserve, to accompany a home purchase. We have one of those and set aside 1% of the value of our home every year. This year I have more than once longingly considered repurposing that reserve for remodeling, but we have very clear parameters for that money. It is to fix or repair anything structural or functional in our home. For fun stuff like fancier kitchen cabinets or a definitively white couch, we would have to start a new savings account for remodeling and furniture.

Aside from dramatically higher prices for building materials, why wouldn't we go ahead and remodel now anyway? It's been a tough year. Don't we deserve it? Sure, we don't have the money saved for it, but we could tap into our home equity. After all, this is our forever home. We could add to its value plus get to enjoy our improvements in the meantime. Remodeling would then be an investment. Win-win!

Uh oh, there's that lizard brain again fighting dirty with her tactic of using my love language of "investment" against me. Luckily, I have a way to fight back, and it's called math.

Here is the rule on considering any renovation or remodel as an investment. Figure out how much you are going to pay and the return on your dollar when you go to sell the home.

When I was running this concept by my Save10 co-founder, Stephanie Matthews, she had contractors coming out to her house to discuss a bathroom remodel. I asked her why she was doing it when building costs were so high. "Ugh, SC, I wanted to put this off so badly, but a leak from our shower was causing our subfloor to rot. We have to take care of this now to fend off a bigger problem." Since they had to rip out all the tile, it made sense to give the 1960s bathroom a facelift.

I asked her how she knew how much she could afford to spend. Did she figure out what she wanted in the bathroom and then brace for the cost? Her response floored me: "I called up my Realtor and asked her to give me an estimate of what we could sell our house for, assuming a bathroom upgrade, and that helped us keep the costs in line. We were able to give a budget to our contractors."

What a concept! I called up agent Karen Moulton with Capital Sotheby's International Realty and asked her if people really ask real estate agents to give them a home value assuming repairs or new additions. She got very animated and said, "Yes! Going into a project knowing what to expect when you go to sell will help you make decisions about how much to spend. We don't want you overimproving and not being able to get your money out of the house."

There is a myth that anything you do to a house will increase its value by at least the amount you spend, but in reality, people should mentally prepare to get less value out of the remodel cost. Probably the recent spike in construction costs doesn't help. And remember that not all remodel investments are the same. Housecall publication gave a garage door replacement as an example of a project with a 94.5% return on investment. But a major upscale kitchen remodel had a shocking return estimate of just 54%.

I think about the frequency of remodeling as well. Shouldn't a kitchen design last a good 20-30 years? A buyer is going to pay for just one kitchen, not two or even three. Think about the influence of HGTV, an entire channel devoted to home improvement, that seems to convince us that styles for kitchens and bathrooms change as fast as styles for jeans. That frequency and magnitude of upgrades surely tips the scale from investment to consumption.

A pair of $300 fashionable jeans suddenly seems quite affordable next to the tens of thousands of dollars that are now being spent largely for enjoyment and consumption, not investment, of the spaces we are creating.

I asked Stephanie why she was sweating the cost of her bathroom when a lot of people get so much enjoyment out of the upgrades. She responded very matter-of-factly. "My husband and I like to travel. That's our enjoyment, and I think about how we could use this money to do that thing we love the most. Seeing that money go out the door makes me realize that every day we are vacationing into our bathroom, rather than vacationing to Europe."

Point taken. So how do we pay for remodels? Home equity seems easy, and indeed many people are using their homes again as cash ATMs. Of course, there are a couple of problems. Since people don't want their payments to go up, they might extend the loan to keep payments the same. They might not be considering the freedom to be financially independent at their targeted retirement age, and how that might be jeopardized.

But then let's say you take out the home equity and keep the length of the loan the same. You are agreeing to higher overhead costs that might then squeeze out travel or vacations or happiness-induced discretionary spending, or maybe worse, having to decrease retirement savings to make room for the higher payment.

The best way to pay for a remodel? Save for it ahead of time. Open a trusty old savings account, figure out what and how much you are willing to give up each month to stash that money into a remodeling account, and auto-transfer that money into savings. By saving for the project, you are far less likely to sacrifice spending on experiences that bring joy or reduce retirement savings. Then, when the time is right, consider a first call to the real estate agent, not the contractor.

Oh, and in our case, before we fix the drywall behind the timeout chair, we should probably replace the busted-out window on the garage door from an ace soccer shot.

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