Whether you already own a house or just have plans to buy in the future, most people have thought about what it would take to turn their property into their dream home. Whether it's starting over and building from scratch or taking an existing residence and doing extensive remodeling, the thought of having all the amenities you'd ever need while getting rid of those annoying quirks that have grated on you for years makes the prospect of doing home improvements almost irresistible.
Of course, remodeling and renovations can cost a lot of money, and in these days of tight budgets and small or nonexistent pay raises at work, it might make the idea of creating your dream home seem like an impossible dream. Yet there is a way you can put together the financial resources you need to have the home of your dreams without mortgaging your future in the process. The key is an easy-to-understand investing principle that can provide a solid foundation upon which you can build your net worth.
What it takes to build your dream home
If you've never looked at the costs of remodeling, prepare for a shock: The price tags involved can make it seem like you'd be better off starting from scratch. Starting at the low end, there are a few projects you can do without breaking the bank. For instance, adding a deck to your home costs an average of about $9,300 for a midrange home, according to figures from Remodeling Magazine. Window replacements also run in the $10,000 range, and a bathroom remodel typically costs around $15,000.
But once you start looking at some more ambitious projects, the dollar amounts you'll see start to get really serious. Thinking of remodeling your basement? Expect to pay around $60,000. A major kitchen remodeling can run $50,000 or more, and putting in a sunroom carries about a $70,000 price tag. And if you want the master suite of your dreams, you can start thinking of six-figure sums.
Moreover, if you already have an upper-end home, then remodeling projects get even more expensive. A luxury kitchen remodeling can easily take you over the $100,000 mark, while adding a master suite in an upscale house costs an average of $220,000.
If you're like many homeowners, it's easy to justify those expenditures to yourself by arguing that they enhance the value of your home. In theory, you should therefore get your remodeling expenses back when you sell your home.
In reality, though, you can only expect to see a fraction of what you pay on a remodeling project to flow through to the value of your home. Such projects typically add between 50% and 75% of their cost to your home value. And, disappointingly, the projects with the highest price tags are often the ones that pay off the least.
One danger with home remodeling projects is that it's easy to overextend yourself. Most banks are happy to offer home equity loans or lines of credit to finance remodeling projects, and the interest rates are low enough to make maintaining the debt look deceptively easily. Yet if you're not careful, relying too much on debt to build the home of your dreams will leave you regretting having made the decision in the first place. After working so hard to get your home just right, financial regret is the last thing you want.
How you can afford the home you want -- without debt
Taking on a bigger mortgage or home equity debt clearly isn't the ideal way to finance an expensive remodeling project. But finding $100,000 or more to do all the work to turn your house into a true home may sound impossible. That's where many people give up on their dreams -- never realizing that a simple investment strategy that uses the financial principle of compound returns can turn even modest savings into six-figure sums. Simply by choosing smart investments and reinvesting income into additional shares, you'll see faster growth in your available wealth than you'd imagine.
The challenge with compounding is patience. The longer you have, the less money it'll take for you to reach a certain financial goal. For example, if you have a goal of raising $100,000, you'll need to save about $1,475 per month for five years if you can earn a 5% return on your investment. But if you have 10 years to save, you'll only need to set aside $650 per month.
But if you don't want to wait that long, you can also shorten the time -- or reduce your monthly savings -- by finding investments that have better returns. Boost your return from 5% to 10%, and you'll only need to save $1,300 monthly for five years, or $490 for 10 years. If you keep saving $650 instead, it'll take you just over eight years, cutting almost two years off your waiting time.
A 10% return isn't out of line with the long-term average of the stock market, so a simple index fund might be all you need to help you reach your goals. But if you want to have even more money to put toward your dream home -- or get that home faster -- then you should aim to find stocks that will beat what the broader market returns.
Even small additional gains in returns can add up to bigger increases in your final balance than you'd expect. For instance, take the same $490 monthly savings amount that we discussed above, but instead of accepting the stock market's 10% average return, say you find a stock that can produce returns of 15% year in and year out. After a decade, you'd have almost $135,000. Earn an average annual return of 20%, and you'd get to almost $185,000 -- enough to do a whole lot more work than you originally thought you could do.
The challenge, though, is finding stocks that can give you 20% returns for a decade or more. The risk is that if you pick the wrong stock, you can end up losing everything you save -- and never getting the home you've always dreamed of for you and your family.
Let us help you build your dream home
The secret is to get the right team on your side. Motley Fool co-founders David and Tom Gardner have helped thousands of people invest toward all sorts of goals, from being able to afford to travel across the globe to creating the living space they want to come home to. With the Gardners' flagship Motley Fool Stock Advisor service, you can get access to David and Tom's portfolio of top stocks that have generated impressive returns that can make dreams come true -- whatever they are.
Many of those stocks have special places in homes across the nation. Over a decade ago, Stock Advisor members were introduced to Marvel Entertainment, whose superhero productions attracted the attention of Walt Disney (NYSE:DIS) and gave longtime investors a return of almost 4,100% since mid-2002. Many homeowners have made Netflix (NASDAQ:NFLX) part of their home-theater experience for years, and its video-streaming service has brought longtime shareholders gains of 3,350% since late 2004. And when you want to leave home for a while, priceline.com (NASDAQ:BKNG) is ready to help you plan a trip, treating shareholders to gains of more than 4,300% since mid-2004.
David and Tom could tell you countless stories of real-life families who have used the power of compounding to make their lives better. With their tips, they've not only enhanced the quality of their lives but also put themselves in a position where they have total control over what they want to do.
Most homeowners can't conceive of turning the house they live in into the home of their dreams. But by putting the power of compounding on your side -- and letting Motley Fool Stock Advisor help you pick the right investments -- you can keep your dreams alive and eventually find your way into the home you've always wanted.
Dan Caplinger owns shares of Walt Disney. The Motley Fool recommends Netflix, Priceline Group, and Walt Disney. The Motley Fool owns shares of Netflix, Priceline Group, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.