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If you’re an easy-going person, buying a fixer-upper with plans to live in it while gradually renovating sounds like a great way to enter the housing market, doesn’t it?

That’s what a buddy of mine thought when he purchased a home through an estate sale, which was by all accounts a good deal.

He got a three-bedroom house on a corner lot with lake views and an opportunity for a basement suite for roughly $500,000 in Nelson, a B.C. mountain town with a blazing-hot real estate market.

The idea was simple: the old home needs a fair amount of work throughout, but is still livable as is, so he wasn’t in a rush. He was willing to DIY some of the easier tasks while having contractors gradually take on some of the larger jobs and eventually transform the basement into a separate one-bedroom suite.

It sounded like a good plan, but there’s one thing that took him by surprise: insurance.

Insuring what is in effect a building site can be a pricey proposition because of the increased risk to your home during the construction process. As a result, my friend’s annual premium is roughly $9,000 after his insurer designated his property as high-risk. Many companies he asked to provide quotes wouldn’t even take him on as a customer.

And so the original idea of taking things slowly is out the window; the stressful new plan is to finish the renovations as quickly as possible so his premiums come down and he can start recouping money through the rental unit.

Morgan Roberts, director of RH Insurance in Ontario, says homeowners are regularly caught off-guard when it comes to insurance during a renovation. Her own husband was shocked that they’d have to buy a $4,500 insurance add-on to their regular premium when they went through a large-scale renovation of their home.

Ms. Roberts says people need to take home insurance into account when budgeting both money and time for their renovation. She’s seen annual rates go as high $10,000 for some projects, while smaller jobs can still cost around $1,000 in add-on insurance.

Insurance plans for this kind of work can operate in different ways. Some companies offer you an add-on package, while others charge you a sky-high premium that is brought back down to earth once the work is done. That means the quicker the job is completed, the sooner you’ll pay cheaper rates.

“I don’t think people take that into consideration when they plan things out for their renovations,” Ms. Roberts says.

To avoid last-minute panics, Ms. Roberts says people need to involve their insurer early on in the renovation or home-purchase process. She says any job that could require a contractor – such as renovations to a kitchen or building an addition to your home – may call for extra insurance coverage.

And for anyone considering buying a home that requires so much work that you can’t live in it during construction, beware: insuring an uninhabited construction site is even more expensive. Ms. Roberts says this is because these types of comprehensive projects tend to carry even more risk, especially since there are times when nobody is around in case something goes wrong.

My friend will be financially all right in the end. But in a real estate environment where millennials are pouring so much of their income into a home, not everyone can absorb thousands of dollars in unexpected costs.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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