Analyze the Numbers

Does It Meet Your Finance Objectives

Before starting your home remodeling project, understand the numbers that will be required. Would it be better to buy a new home instead of making a major renovation. Run the analysis.

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analyzing the numbers

Home Renovation Considerations

Question:
the cost to renovate your existing home — will you get a good return on your remodeling investment (ROI)?

— or in other words, would you get a better ROI if you bought or built a new home that satisfies your remodeling objective?

Answer:
a positive remodeling ROI will depend on several factors, namely,

1) type and cost of renovation
2) market valuation, and
3) home comparison

these factors are discussed below

Type and cost of renovation

  • Perhaps you are looking at a simple remodeling project such as sprucing up your living area.

    This can be accomplished with a new paint job or a new floor. These types of "home improvement" projects do not necessarily impact your home value assessment and generally result into a neutral ROI.
  • On the other hand, making a room addition by knocking out a wall and expanding the physical structure of your home can impact your home value assessment.

    These type remodeling projects can be very expensive. Depending on your area and type of renovation, your remodeling product could result into a positive or negative ROI.
  • Getting a positive ROI on your home renovation project depends.
    • on your neighborhood,
    • value assessment of surrounding homes,
    • the positive growth of the community,
    • and the personal tastes of the area.

Market valuation

  • How are the market values of homes in your particular area holding up?

    If home prices are increasing, a renovation project may add a percentage value to your existing home value.

    If the market values in your particular area are decreasing, a renovation project may fail to add any new value to your home.

    you can get an online assessment of your neighborhood and surrounding home values
    get a quick assessment of market values

Home comparison

  • What will your home renovation do the overall look of your home as compared to similar homes in your neighborhood.

    You might find that your type home renovation doesn't fit your neighborhood look, which can in some cases decrease the overall value of your renovation.

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analyzing the numbers

Predicting Neighborhood Values

Question:
are there any indicators that can help predict the future movement of home values in your neighborhood?

Answer:
nobody can predict market movements. A number of unforeseen developments can impact neighborhoods and home values.

The most reliable predictor is a "qualitative" review of several factors, namely:

Check your neighborhood

  • Double check your surrounding neighborhoods prior to starting any home renovation.

    Potential threats such as a new highway construction or other "non-neighborhood" construction may impact your area's future home values.
  • Also investigate any potential zoning changes that may be on the docket.

    What was once a quiet neighborhood can easily be transformed into a noisy shopping center with increased traffic.

    Lookup county and city governments for zoning changes:
    statelocalgov.net

Make sure your boundaries are secured

  • Review your neighborhoods existing boundaries.

    Are they secured? An open field could potentially mean future development that could be positive or negative.

    What is the boundary between commercial property and residential property? Are the commercial zones inching closer to your neighborhood? Are there secured boundaries that will halt commercial encroachment.

    What about the roads you live on. Are they the main thoroughfares for your neighborhood. What was once a quiet road can easily become a heavy, traffic road by increased development.

Estimate the commuting time

  • How important is your commute and how much time do your spend on the road?

    What about other commuters who may be interested in your neighborhood? Does your neighborhood allow easy access to commuting facilities and highways?

    Also investigate what might happen if you change your current job. If you are planning a job change within a few years, you might at least consider the purchase of a new home instead of a major home renovation.

Check current traffic conditions:
sigalert.com

Check your local transportation options:
apta.com

Check the schools

  • Regardless of whether or not you have children, check the quality of schools in the community.

    Any positive remodeling ROI will depend on the quality of schools in your area, particularly elementary schools.

    Investigate the average class size, the facilities, and the method of transportation. Evaluate the overall quality of the public school system.

    Locate schools servicing your area. View calendars, student analysis, contact information, etc.:
    publicschoolreview.com

    School report :
    homefair.com
    Compare schools:
    schoolmatch.com

Do some shopping

  • How quickly can you access local shops, grocery stores, restaurants, and shopping centers from your neighborhood?

    Can you buy a loaf of bread quickly, or must you travel long distances for basic items?

    Further evaluate the quality of merchandise being sold in the stores. Quality merchandise indicate a more stable and upscale market.

Walk the neighborhood

  • Explore your neighborhood within a 12 block area.

    Pay particular attention to your neighborhood's boundaries such as a highway, park, campus, or other fixed structures.

    Check to see if the homes in the neighborhood are increasing or decreasing in value. It is a good idea to determine the demand for homes in the neighborhood. Too many "For Sale" signs are a good indication that something is happening.

    Find the value of existing or future homes:
    view market valuation

Calculate housing fees:

  • What is the tax rate for the area?

    High taxes and high municipal service fees can decrease a neighborhood's value.

    Lookup county and city governments:
    statelocalgov.net
    City cost comparison:
    homefair.com

Check the negatives:

  • Any one negative in the neighborhood can counteract two or three positives.

    Check for negatives that could potentially devalue a neighborhood. For example:

    Rising neighborhood crime.
    How effective is the crime watch programs in your neighborhood?

    Check crime statistics:
    homefair.com


    Heavy traffic in and around the neighborhood.
    Evaluate how traffic patterns have increased, if any. Are there any potential growth or changes in any underdeveloped areas surrounding the neighborhood that can increase traffic?

    Note any loud sounds,
    such as airline traffic, nearby factories, major throughways, and ball parks.

    Visual pollution,
    such as power lines, radio and television towers, auto and bus fleet parking lots, ball fields that play night games, and salvage yards can devalue homes.

    Smells such as bakeries, food processing plants, and factories.
    These units may be miles away, but a down drift could affect the quality of air in the neighborhood.

    Find out who frequents the neighborhood and when.
    Some neighborhoods have multiple personalities and attract different crowds during the day or night.

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analyzing the numbers

Calculating Your Home Value (Equity)

Knowing your home value will help determine the percentage of home renovation cost that should be applied to your home.

Home remodeling percentages around 20-30% are acceptable ranges for most neighborhoods. Again, this will vary by region and by type of renovation.

For example, if your current home value is estimated at $200,000 and your home remodeling cost is $40,000, your remodeling percentage is approximately 20% of your home value and is acceptable for most neighborhoods.

Renovation projects above 30% of your home value are not generally acceptable for most neighborhoods. The cost would be better spent on the purchase of a new home. Of course, this can vary by type renovation and location.

Calculating your home value:

Your home value is determined by a number of factors including type of home, location, values of existing home sales in your respective area, and growth expectations for the community.

The simplest way to calculate your estimated home value is to take the sales value of similar homes in your neighborhood. If homes in your neighborhood are selling for $200,000. Your home value may be similar to that price.

Home values can vary depending on your location (homes on cal de sacs bring a higher value than homes situated on busy streets).

view our market valuation page to estimate your home value

Getting a home appraisal:

A more thorough home valuation involves an appraised value from a professional.

These individuals will estimate your home value based on a review of your home and neighborhood, value assessments from real estate professionals, and a number of other valuation tools and appraised reports.

Appraisals cost can vary, depending on the type of appraisal and area. An appraisal will likely be required if you apply for home renovation financing.

find local, top-rated appraisers

Calculating your equity value:

The calculation is simple. Take your market value and subtract the amount you still owe on the home including any second or third mortgages.

calculate your equity value

Calculating your borrowing potential:

LTV refers to Loan-to-Value.

The amount lenders will lend you is based on a percentage of your home value minus any existing home loans that you still owe.

For example, if your home value is $200,000 and your existing mortgage balance is $100,000, your equity value is $100,000.

At 100% LTV, you can borrow the full amount of your equity value. At 70% LTV, you can borrow 70% of your home value minus existing mortgage balance (giving you a borrowing amount of $40,000 in this example).

70% LTV ($200,000 x 70%) = $140,000
minus: existing mortgage = $100,000
equals: equity borrowing amount = $40,000

Lenders generally lend money at lower rates for lower LTVs.

open our LTV calculator to estimate your borrowing potential

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analyzing the numbers

Calculating Remodeling Costs

Calculating the cost to remodel or renovating your home can vary by region and season.

In areas where labor costs are tight or where there is a lot of home construction activity, your remodeling costs can be high.

Another cost determinant is type of renovation.

Expanding your home's physical structure is more costly than making an internal home remodeling change.

Home expansion may require roof extension, exterior siding, insulation, wiring and plumbing, and room decorating.

Calculating the costs of remodeling requires pricing the following:

— construction materials
— construction labor
— permit fees

— decorative enhancements
— repairs due to remodeling
— cleanup

Your contractor should provide these costs when they submit a bid. Make sure you review the bid carefully to ensure that all costs have been included:

view estimating costs
  • All required permit fees.
  • Labor costs and total hours required. Make sure costs include payroll taxes and workers' compensation insurance.
  • Tools and construction equipment.
  • Safety equipment such as hard hats, dust masks, gloves, and goggles.
  • Materials — includes lumber, plumbing fixtures, flooring, cabinets, paint, insulation, tile, countertops, heating, and ventilation units.
  • Incidental repairs that may be required when tearing into the existing house structure.
  • Cleanup including rental bins, removal service, and dumping fees.
  • Decorative enhancements such as light fixtures, window coverings, and other specialty decor items.
  • Subcontractor fees — fees from a specialized contractor such as an electrician.
  • Other expenses — may include upgrades and changes.
These costs are best estimated when you supply the contractor a complete project specification plan:
view remodeling spec planning

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analyzing the numbers

Estimating Your Payback Figure

The main incentive for home remodeling is for personal comfort and need.

But you would it be nice if the remodeling investment had a positive return on your resale value.

The increase in your home value is determine by the type of home remodeling and region. Another factor is determine by the neighborhood assessment as discussed above.

You can estimate the possible value percentage using this payback estimator.

It will show the type of renovation and region and estimated payback for your investment.

see home remodeling estimate assumptions

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analyzing the numbers

Calculating Financing Costs

Use these calculators to estimate how much you can afford for home renovation.

  • Monthly Payment Calculator:
    estimates the monthly payment on the amount borrowed
  • Monthly Affordability Calculator:
    estimates how much you can borrow on a budgeted monthly payment.
Monthly Payment Calculation
Enter the amount you want to borrow:
Enter the number of months to repay:
Enter your estimated loan rate (APR): %
 *
Your Monthly Payment
 
Monthly Affordability Calculation
Enter the amount you want to pay per month:
Enter the number of months to repay:
Enter your estimated loan rate (APR): %
*
Loan Amount to Borrow
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. The circumstances surrounding your credit and loan qualifications may result in different calculations.

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analyzing the numbers

Tax Benefit of Home Renovation

You can deduct the related interest portion of your home improvement loan payment from your taxes if you qualify.

Your home improvement loan must be secured by your home such as a home equity loan, home equity credit line, or secured home improvement loan; and

You must itemize your deductions on Schedule A (Form 1040). You need to see your tax advisor to determine whether you qualify for interest-paid deductions

The following calculation shows the estimated "Effective Interest Rates" for each income tax bracket.

The "Effective Interest Rate" is the calculated annual interest rate that you will pay for the year after you deduct qualified home equity interest from your taxes.

view "Effective Tax" calculator

Interest rate charges and other related costs to service your home improvement loan are generally tax deductible.

This will include points paid and other up front lending fees, if any. See your tax advisor for further information.

Need a financial advice from a CPA:
cpadirectory.com
Complete and file your own taxes using your PC:
quicken.com

IRS-related publications and forms for homeowners:

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Helpful Tools

Some helpful forms to select and manage contractors:

contractor evaluation form
selecting contractor form
working w/ contractor form
managing contractor form

 

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