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How to pay for home remodel
Old 12-01-2021, 09:41 AM   #1
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How to pay for home remodel

Over Thanksgiving a good friend who I help with financial matters posed the following question and I'd love to get feedback from this esteemed group.

She (50 yo) is planning to remodel her current primary residence, which will cost $200k. Yes, that's a lot, but this is the home she plans live in the rest of her life in, so let's ignore the cost for a minute.

She owns a rental property (a condo) that currently covers costs, but isn't really an income source for her. There is enough equity in the property to cover the cost of the remodel.

Her current residence will be paid off in a few months. So, she could do a cash out refi or HELOC and pay for it at current low rates.

Question is should she sell her rental and pay, or get the mortgage?

I assume this is a similar question to pay off your house or keeping a mortgage. Keeping a mortgage at low rates and investing the money you would use to pay off is the financially sound decision, but not having a mortgage has a certain psychological benefit.

For this situation, her rental property isthe investment and based on the area it is in she can't see it appreciating significantly more than the market and it is a relatively older complex, so maybe not the best investment.

Thanks for your thoughts.
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Old 12-01-2021, 10:08 AM   #2
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I'd sell the property, pay off the current mortgage, then borrow at cheap rates to cover the remodel. Most likely a 15yr mortgage.
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Old 12-01-2021, 10:16 AM   #3
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I'd sell the property, pay off the current mortgage, then borrow at cheap rates to cover the remodel. Most likely a 15yr mortgage.
Agree. They are really two decisions but Id do both. Id finance the remodel no matter what she did with the condo. Money is too cheap right now to not finance it. As for the condo, it seems like its past its prime and if shes willing to get out from under it, may as well do it now. Together, she could probably invest the money and pay the finance costs on the loan.
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Old 12-01-2021, 10:16 AM   #4
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Things to think about...

1. Is the rental property providing a tax benefit? If so, how much/year?

2. What would the refi/HELC mortgage interest rates be?

3. Can she live in the rental property for 2 years while the remodel gets done very slowly?

4. Is there anywhere else she would rather live that would meet her needs?

...I don't really have any answers, but these questions may help her think through some more options.
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Old 12-01-2021, 10:21 AM   #5
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+1 on a refi. Biggest advantage there is the fixed rate interest. I don't know of a HELOC that offers a fixed rate.
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Old 12-01-2021, 10:28 AM   #6
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Agree with most, get a mortgage to pay for the remodel.

At $200K remodel, is there a danger she will make her house less sell-able, as it will be too expensive compared to neighbors ?

Will this remodeling be done in stages, or will the house become unlivable.

I have to wonder if this person can really afford this, or is being "sold" the idea because who doesn't like a magazine looking house.

The issue of the rental is basically separate.
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Old 12-01-2021, 10:39 AM   #7
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Agree with most, get a mortgage to pay for the remodel.

At $200K remodel, is there a danger she will make her house less sell-able, as it will be too expensive compared to neighbors ?

Will this remodeling be done in stages, or will the house become unlivable.

I have to wonder if this person can really afford this, or is being "sold" the idea because who doesn't like a magazine looking house.

The issue of the rental is basically separate.
Sunset, to your questions:
1. I don't think this is so relevant, as she plans to live her until she dies and has no heirs
2. She will be able to live there while it is being done.
3. She really wants this. She's single, has a nice income, low expenses and this is what she decides to spend her money on.

Thanks all for the thoughts and I agree that selling the condo, investing the proceeds and doing a refi for the remodel is probably the best way to go. She will just need to get past the psychological barrier of having a mortgage again when she is so close to paying it off.
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Old 12-01-2021, 03:52 PM   #8
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Sell the condo. Whats the point of owning rental property that doesnt provide income and does not have likelihood of appreciation? Is it a tax advantage?
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Old 12-01-2021, 08:16 PM   #9
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Not enough specific info to offer even a suggestion. Off hand $200K remod. sounds ridiculously expensive. Owning a rental and not knowing finance well enough to make her decision is a red flag. I'll quit there as YMMV.
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Old 12-01-2021, 08:37 PM   #10
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I can't wrap my head around a $200k renovation unless it was a 5000 sq ft monstrosity taken down to the studs.

I can't advise on financing but do wonder if there's a chance that the renovation is overpriced and someone is looking for a big payday?
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Old 12-01-2021, 08:48 PM   #11
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I can't wrap my head around a $200k renovation unless it was a 5000 sq ft monstrosity taken down to the studs.



I can't advise on financing but do wonder if there's a chance that the renovation is overpriced and someone is looking for a big payday?

We just got a ballpark quote of $140k for a kitchen and master bath remodel. Details still need to be worked out, but it wont be cheap.
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Old 12-01-2021, 09:10 PM   #12
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It can really run up costs if you go for high end stuff, like Viking ranges and Sub Zero refrigerators
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Old 12-01-2021, 09:10 PM   #13
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.... She owns a rental property (a condo) that currently covers costs, but isn't really an income source for her. There is enough equity in the property to cover the cost of the remodel. ....
Was the condo previously her primary residence? If so, how long has she rented it?

Sounds like the condo is a suboptimal investment from what you wrote... so this would probably be a good time to sell.

If she didn't finance the renovations, where would the $200k come from? What kinds of assets would be used for the renovations?

If she has $200k languishing in checking or savings or other low rate assets then she might be better to use those and lose out on less than 1% rather than pay 3% or more.
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Old 12-02-2021, 10:22 AM   #14
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Was the condo previously her primary residence? If so, how long has she rented it?

Sounds like the condo is a suboptimal investment from what you wrote... so this would probably be a good time to sell.

If she didn't finance the renovations, where would the $200k come from? What kinds of assets would be used for the renovations?

If she has $200k languishing in checking or savings or other low rate assets then she might be better to use those and lose out on less than 1% rather than pay 3% or more.
Correct, it was formerly her primary residence, then she rented it out and it did provide positive cash flow, but over the years (10ish) the HOA fees and Mgmt fees have increased to the point that it has eroded most of that cash flow.

If she doesn't finance the refi, she'd use the proceeds from the sale of the condo.

And, I agree with everyone that the $200k i alot, but that's a seperate discussion which we'll have to make sure she isn't getting ripped off.
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Old 12-02-2021, 11:17 AM   #15
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Correct, it was formerly her primary residence, then she rented it out and it did provide positive cash flow, but over the years (10ish) the HOA fees and Mgmt fees have increased to the point that it has eroded most of that cash flow.

If she doesn't finance the refi, she'd use the proceeds from the sale of the condo.

And, I agree with everyone that the $200k i alot, but that's a seperate discussion which we'll have to make sure she isn't getting ripped off.
I wonder is this condo in a rent controlled area ?

If not, I have to wonder why she hasn't been increasing the rent each year to offset the increased costs ?
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Old 12-02-2021, 11:20 AM   #16
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I wonder is this condo in a rent controlled area ?

If not, I have to wonder why she hasn't been increasing the rent each year to offset the increased costs ?
It's not rent controlled. It's really just the market
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Old 12-02-2021, 12:56 PM   #17
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30 year FRM, not 15 year.
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Old 12-02-2021, 02:42 PM   #18
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Correct, it was formerly her primary residence, then she rented it out and it did provide positive cash flow, but over the years (10ish) the HOA fees and Mgmt fees have increased to the point that it has eroded most of that cash flow.

If she doesn't finance the refi, she'd use the proceeds from the sale of the condo.

And, I agree with everyone that the $200k i alot, but that's a seperate discussion which we'll have to make sure she isn't getting ripped off.
If it was her principal residence for 2 of the last 5 years (essentially she has rented it less than the last 3 years and she meets other criteria then the gain may be tax free under the principal residence gain exemption.

She may want to explore what the tax would be on the gain with her tax advisor before pulling the trigger on selling just so she can make an informed decision rather than sell and be surprised by a big tax bill.
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Old 12-02-2021, 04:57 PM   #19
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If it was her principal residence for 2 of the last 5 years (essentially she has rented it less than the last 3 years and she meets other criteria then the gain may be tax free under the principal residence gain exemption.

She may want to explore what the tax would be on the gain with her tax advisor before pulling the trigger on selling just so she can make an informed decision rather than sell and be surprised by a big tax bill.
It's been probably 10 years since she lived in the house and agree, I've told her to speak with her accountant about what the Cap Gains would be before she pulled the trigger.
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Old 12-02-2021, 07:49 PM   #20
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Ditch the boat anchor condo, and try to reduce the price on the remodel is my vote.
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