How to pay for home remodel

[brokrken]

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.

 

[Cassius King]

I'd sell the property, pay off the current mortgage, then borrow at cheap rates to cover the remodel. Most likely a 15yr mortgage.

 

[Jerry1]

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 I’d do both. I’d 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 it’s past it’s prime and if she’s 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.

 

[levindb]

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.

 

[ExFlyBoy5]

+1 on a refi. Biggest advantage there is the fixed rate interest. I don't know of a HELOC that offers a fixed rate.

 

[Sunset]

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.

 

[brokrken]

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.

 

[jazz4cash]

Sell the condo. What’s the point of owning rental property that doesn’t provide income and does not have likelihood of appreciation? Is it a tax advantage?

 

[Koolau]

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.

 

[Music Lover]

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?

 

[Dash man]

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 won’t be cheap.

 

[Souschef]

It can really run up costs if you go for high end stuff, like Viking ranges and Sub Zero refrigerators

 

[pb4uski]

.... 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.

 

[brokrken]

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.

 

[Sunset]

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 ?

 

[brokrken]

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

 

[rayvt]

30 year FRM, not 15 year.

 

[pb4uski]

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.

 

[brokrken]

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.

 

[MC Rider]

Ditch the boat anchor condo, and try to reduce the price on the remodel is my vote.

 

[Music Lover]

We just got a ballpark quote of $140k for a kitchen and master bath remodel. Details still need to be worked out, but it won’t be cheap.

No, that's not cheap. No offence, but I could build an entire house for $140k. But it's likely that my definition of a house and what it contains is a lot different than yours.

 

[skyking1]

yes BTD is subjective

 

[jazz4cash]

In our HCOL area many condos are value traps because the fees cost nearly as much or more than the monthly mortgage expense. It seems like the current sellers market would be a good time to unload. Too bad it wasn’t sold when it would e qualified for the capital gains exclusion. At some point it could go cash flow negative because of the fees. That can lead to deferred maintenance, expensive assessment and other bad outcomes.

 

[stephenson]

Uh ... tents have been increasing - significantly - over the last two years.

I also don't understand how HOA and management fees can zero out the rental income.

And, to another poster who posits his ability to build a new house for $140k ... also confusing.

 

[Dash man]

Uh ... tents have been increasing - significantly - over the last two years.



I also don't understand how HOA and management fees can zero out the rental income.



And, to another poster who posits his ability to build a new house for $140k ... also confusing.

We bought our home in 2001 for $308k, and now it’s maybe worth $580k. Our insurance company says the rebuild cost would be over $900k. Building a home for $140k would be a one bedroom on a small lot with cheap materials, if it could be done.
Four years ago we spent $100k doing a remodel of our Florida condo. For what we want done to our primary home, the $140k for the kitchen and master bath is not out of the question. We do want high quality materials and fixtures. It’s a company that has been in business for 50 years and has full design services.