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Rehab Your Home With a Plan That Saves Money and Maximizes Value

Apr 22, 2020 by Steve Cook

Without adequate upkeep, the passage of time will lower the value of your house. But in most suburban and urban areas, the value of your land will appreciate while the home itself depreciates with age, possibly leading to a less-than-satisfactory purchase price. If you never rehab your home, eventually your land could become worth more than your house. Walkable and urban locations sell at a premium, and at some point, a buyer might decide it makes more sense to tear down the old structure and build an entirely new one rather than try to fix it. Some 8% to 10% of new home starts each year are teardowns.

Before your property reaches that point, you can give your family home a new lease on life with a major rehabilitation. After all, you're not alone. A lot of America's aging homes require serious attention. Homeowners spending $50,000 or more contributed one-third of national improvement outlays in 2017.

Rehab or renovate?

Whether to rehab a home or renovate a home is a real estate decision that's largely a matter of degree. Renovations are less disruptive. Rehabbing often requires the owners to vacate the premises for weeks or even months. Rehabs can also be expensive. They can vary from a few thousand dollars to $100,000 or more, but they add more value to your property and make a home easier to sell.

Changing tastes and lifestyles lead to changes in home designs, especially when it comes to kitchens and bathrooms. Fifty years ago, mom cooked dinner alone, and kitchens were designed to put appliances and cupboards in easy reach of a single person. Today, kitchens have evolved into family gathering spaces where everyone can eat breakfast or enjoy an afternoon snack at a countertop or island. Bathrooms were once designed as small spaces where people didn't linger. Today they are spaces to relax in private and often include more than one sink and space to dress.

Whether you undertake a major rehabbing project or not, the sooner you get going, the less you will spend. It's a lot cheaper to replace a roof than to replace a roof and fix the damage caused by an old leaky one. Similarly, it costs less to install a new electrical box at the same time a new alarm system is installed.

Kitchens and bathrooms are not only the most renovated rooms today; they are also the most expensive rooms to renovate, according to a study by Houzz. A rehab that includes kitchens and bathrooms is a significant project that may require moving out for a month or more. It makes sense to take care of other needs at the same time, such as updating home systems like electricity and HVAC, tearing down walls to create an open feeling, and other improvements.

A major rehab may require an architect or a design/build contractor. Design/build firms offer start-to-finish building services and employ architects or designers as well as skilled builders and tradesmen. A design/build firm makes sense if you have a distinct idea of what kind of renovation you want and also don't feel that you need help overseeing the construction process.

If you are not moving rooms around, you may be able to stretch out a rehab-size project into a series of projects that you can manage yourself. Spread your projects over two or three years to reduce the stress on your household and make it easier to pay as you go.

How to plan a modest rehab

Begin by getting expert advice

When you bought your home, you probably hired a home inspector to check it out. For a small fee, hire a professional inspector again to go over your home from attic to crawl space and prepare a report on what needs to be repaired, replaced, or rehabbed by priority. You can find a licensed and certified local home inspector at the International Association of Certified Home Inspectors.

Review the inspector's report and create a list of rehab projects

Organize tasks by contractor (e.g., plumber, electrician, landscaper) so you can save money by reducing the number of visits. Identify significant projects such as upgrading the HVAC, finishing the basement, remediating mold, or replacing old windows. Find contractors for each project, discuss your needs with them, and get estimates.

Budget and schedule each project

If you have significant equity in your home, you can potentially take out a home equity line of credit (HELOC) to withdraw funds. If you want to avoid taking out a loan, cash-out refinancing does not need to involve a second loan. You simply refinance your home for a larger amount and take the difference in cash. Get estimates at the beginning of each year, and plan each rehab project to take advantage of contractors' slow times in the fall and winter months.

Stay flexible

Natural disasters, emergencies, health issues, and other unexpected events may force you to alter your plan. Be flexible, but also stay determined to meet deadlines to stay on schedule.

Get a new appraisal when you are finished

Provide the appraiser documentation of the costs of your rehab, and walk him or her through the changes, perhaps with "before" photos to illustrate how the changes have improved the property. The new appraisal will tell you how much you have raised the value of your home. This can help you understand whether or not you would be satisfied with your home's new potential purchase price. After the new appraisal is filed in the appropriate databases, it will create a new reference point for future appraisals.

Financing a rehab project

The housing recovery has helped owners build their equity to record levels. Those who bought before the housing boom 20 years ago or after the bust in 2007 have done the best. Over the past year alone, the average homeowner's equity has increased by an average of $7,300 per homeowner compared with one year earlier. The typical homeowner who purchased a home in 2012, the year prices reached their lowest point following the Great Recession, has gained an average of $141,000 in equity, an increase of 261%, according to Redfin.

Prudent owners can save their cash and use their home equity to finance a rehab in three ways:

1. Borrow it

Most lenders who originate mortgages also make home equity lines of credit (HELOC). These loans use your home equity as collateral and operate like checking accounts, so you borrow the amount you will actually need from a lender. The Federal Housing Administration (FHA) also offers its Limited 203k loan, one of the most popular ways to finance a rehab, which has a $35,000 limit.

2. Sell a slice of it

Several new startup companies offer shared equity plans where owners can sell a "slice" of their future equity for cash and buy it back at its future value in 15 to 30 years. This approach avoids paying interest and incurring debt.

3. Refinance your existing mortgage or take out a new one

Depending upon the rate on your current mortgage, refinancing could be a very attractive option.

Whether you undertake a major rehab or not, the sooner you get going on your real estate renovation project, the less you will spend in the long run. Keeping an aging home in shape with patchwork repairs will get more expensive every year.

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