From Wealthing Like Rabbits – An Original Introduction to Personal Finance by Robert R. Brown. Copyright © Robert R. Brown, 2014. Reprinted with permission of Redford Enterprises. www.wealthinglikerabbits.com
As monstrous as Canada's wedding industry is, it pales in comparison to our home renovation industry. Canadians spend over $50-billion every year on home improvement, and I'm not talking about box sets of the classic Tim Allen television series. It seems that the first thing many of us do once we've found our perfect house is to shell out a bunch of money trying to make it more perfect. Redo a bathroom here, take a wall out there, new hardwood everywhere.
When considering whether or not to do a renovation, you might think that the first question you need to ask yourself is "how am I going to pay for this?" That's a good question and we'll touch on it later, but the question you really need to ask yourself is "why am I doing this?"
One of the most popular rationales for taking on a renovation project is that it will increase your home's value. This is one of those things that sounds great in theory but rarely works out in reality.
Why not, you ask?
First of all, renovations always end up costing more than you expect. Always. There are only three absolutes in life: death, taxes, and your home renovation project will not come in on budget. Guaranteed. When a contractor quotes you $50,000 for a complete kitchen overhaul, you need to understand that it simply isn't going to happen; it will somehow end up costing you more.
Second, while it's true that some renovations can help boost your home's value, rarely does the increase cover the cost of the improvements. Even with kitchen and bathroom upgrades – those areas being the ones that typically bring you the best bang for your renovation buck – you will be lucky if your home's value rises by 70 per cent of the price of the work. Usually it's less. When updating any other area of your house, you will be fortunate if your home's value goes up by even 50 per cent of whatever you spend. As well, whatever bump in value your house gets from the renovation will be relatively short lived. Five years from now your renovation will no longer be new; it will be five years used and won't have anywhere near the impact on your house's value as it did upon completion. You'll never hear a contractor say this but most home renovations have little or no impact on a home's value five years after they are done.
Third, even if a renovation did increase your property's value by as much as you hoped it would (which is highly unlikely) . . . so what? Unless you are planning to sell your house in the near future, the increase in value doesn't help you at all. It's like owning an original 1959 Barbie doll that's worth over $10,000. Cool, but until you decide to pimp Barbie out on eBay, her value is irrelevant. Worse, while the higher house valuation can't help you, it can hurt you if you decide to use it to gain access to more credit through a HELOC or a larger mortgage. Remember, these are not good things.
Lastly, there's no other area of spending that tempts us to spend more once the spending has started than a home renovation does. Our sense and reason filters fail us completely whenever we renovate.
The kitchen faucet starts to leak, so we decide to "upgrade" it, rather than repair it. The new faucet costs $275 plus taxes. While a new washer would have cost only twenty cents, the new faucet looks much fancier and, besides, it's an "investment" in the house. The thing is, when we go to install the new faucet, we can't help but notice how tired the sink and countertop look in comparison. Two weeks and a credit card swipe later, a contractor is installing the new marble countertop, a glass and tile backsplash, a flush-mount double sink, and an even better looking faucet (we upgraded the upgrade). It looks awesome! Not surprisingly though, the old kitchen appliances don't look so awesome any more. All of a sudden they look dated and too white. We "might as well" get some new stainless steel appliances "while we're at it." We discover that we can get a "deal" on a double door fridge with a crushed ice dispenser if we pair it with the chef-endorsed gas convection oven. Swipe or insert your credit card here. "We're in this far" so let's get the matching microwave hood too. Swipe. Fixing a leaky faucet just cost us $30,000 and, astonishingly, many people are okay with that.
The other rationale for renovating is that people simply want to make their homes a little nicer. And if that's what you want to do and you can afford it, knock yourself (or a wall) out. Just keep in mind that affording it means that you can complete the renovation without interfering with your long-term savings and without going into excessive consumer debt. Yes, adhering to those guidelines may mean that you can't afford the renovation, at least right now. Don't despair though, this is likely the smartest renovation decision that you can make. We see far too many examples of people ripping out perfectly fine kitchens and bathrooms for no practical reason when they simply can't afford it.
That doesn't mean there aren't other options available to you to help improve your living space. Quite the contrary. It's amazing how much a home can be rejuvenated without going into debt, with nothing more than some creative thought, some vision, a couple of accents, and the judicious use of the greatest home improvement product ever invented–paint.
Nothing will transform your house as inexpensively or as easily as a well-chosen coat of paint. It's the near-perfect product. It can completely change a room in just a couple of hours. It's relatively inexpensive and you can do it yourself. There are literally thousands of colours to choose from. Best of all, at least for colour-challenged people like me, painting is not only the most cost effective way to reinvent a space, it's also the most forgiving. If you goof it and choose a paint colour that doesn't work (read: makes you want to barf) all it will cost to correct your mistake is another can of paint and the time required to roll it on. See how that works out for you when you don't like the colour of the heated travertine tile you paid the tile guy $4,000 to install in your bathroom.
If you do decide to go ahead with a complete renovation, be patient and wait at least a year before you start it, even if you have the money needed to do it already socked away inside a TFSA. (You do, don't you? Or you wouldn't even be thinking about doing a renovation, right?) The extra hang time will give you a chance to think carefully about the renovation and whether or not it is really the best idea for your situation. Is there a better way to do this? Is there a less expensive way to do this? Do I really need to do this? Would I get more bang for my buck over the long-term by paying down the mortgage instead? Is a thermostatic walk-in shower with a tsunami class shower head and multiple rotating body jets simultaneously shooting water into every orifice of your body really more important than helping your daughter through university? Does the water coming out of the new faucet taste any different than it would if you had decided to simply replace the twenty cent washer instead?
Please think carefully before taking on any renovation projects. I spent three chapters yammering on about the advantages of buying a smaller home. Don't negate those advantages by doing expensive renovations that your small home simply doesn't need. As usual, every situation is a little different. Think carefully.