Already large home but can we afford this renovation?

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investingfan
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Already large home but can we afford this renovation?

Post by investingfan »

We want a new sun room and a new deck. Three general contractors quoted between 30K-40K. Bought the house early last year at 500K with 20% down 3% 30 year. Lender appraised the house last week 635K. Taking out 50K will be at 3.50% HELOC.

Financial situation 2 kids ten plus years from college. I work from home and partner works part time 2 days a week. Household income total 103K. Spending 65K a year. We have 6-month emergency fund. Retirement total 650K, a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses. This addition will add another 500-600 square feet to our current 3500 square feet log cabin home on 25 acres. We are 41 and 36 living in California. I forgot to mention partner will get a lifetime trust payment in 2 year of 21K a year. Thanks.
exodusNH
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K. Bought the house early last year at 500K with 20% down 3% 30 year. Lender appraised the house last week 635K. Taking out 50K will be at 3.50% HELOC.

Financial situation 2 kids ten plus years from college. I work from home and partner works part time 2 days a week. Household income total 103K. Spending 65K a year. We have 6-month emergency fund. Retirement total 650K, a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses. This addition will add another 500-600 square feet to our current 3500 square feet log cabin home on 25 acres. We are 41 and 36 living in California. I forgot to mention partner will get a lifetime trust payment in 2 year of 21K a year. Thanks.
Is that an intro HELOC rate? If so, when does it reset? Is it variable? What are the limits on adjustments?

I had a HELOC that I opened back in the fall of 2019. It had a great rate of 3.49% for the first year, then variable after it. When I closed on it, the banker said to call once the rate reset since they usually have promotions. Well, I did and they didn't have anything. The new rate was 6.31%. Even after I told them I was simply going to pay off the balance, they couldn't / wouldn't offer a better rate. So now they get 0% in interest.

If you're not able to itemize your taxes to take the interest deduction, you're paying for that loan with after-tax funds. In that case, the interest rate is really 3.5% / (1-your tax rate) -- so somewhere between 4% and 5%.

With an open balance on the HELOC, you may not be able to refinance your first mortgage without their permission. HELOCs are just second mortgages with different name because back in the day "second mortgage" carried negative connotations.
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Watty
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Re: Already large home but can we afford this renovation?

Post by Watty »

investingfan wrote: Wed Jan 13, 2021 10:14 am a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses.
What not sell the rental to raise the money you want?

I am not a real estate investor but aren't those numbers pretty bad for a rental property?
kaudrey
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Re: Already large home but can we afford this renovation?

Post by kaudrey »

Sounds OK to me.

We moved in October to a house with a big deck and more space. I can understand why you'd want a sun room and larger deck!
kaudrey
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Re: Already large home but can we afford this renovation?

Post by kaudrey »

Sounds OK to me.

We moved in October to a house with a big deck and more space. I can understand why you'd want a sun room and larger deck!
Topic Author
investingfan
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Re: Already large home but can we afford this renovation?

Post by investingfan »

exodusNH wrote: Wed Jan 13, 2021 10:38 am
investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K. Bought the house early last year at 500K with 20% down 3% 30 year. Lender appraised the house last week 635K. Taking out 50K will be at 3.50% HELOC.

Financial situation 2 kids ten plus years from college. I work from home and partner works part time 2 days a week. Household income total 103K. Spending 65K a year. We have 6-month emergency fund. Retirement total 650K, a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses. This addition will add another 500-600 square feet to our current 3500 square feet log cabin home on 25 acres. We are 41 and 36 living in California. I forgot to mention partner will get a lifetime trust payment in 2 year of 21K a year. Thanks.
Is that an intro HELOC rate? If so, when does it reset? Is it variable? What are the limits on adjustments?

I had a HELOC that I opened back in the fall of 2019. It had a great rate of 3.49% for the first year, then variable after it. When I closed on it, the banker said to call once the rate reset since they usually have promotions. Well, I did and they didn't have anything. The new rate was 6.31%. Even after I told them I was simply going to pay off the balance, they couldn't / wouldn't offer a better rate. So now they get 0% in interest.

If you're not able to itemize your taxes to take the interest deduction, you're paying for that loan with after-tax funds. In that case, the interest rate is really 3.5% / (1-your tax rate) -- so somewhere between 4% and 5%.

With an open balance on the HELOC, you may not be able to refinance your first mortgage without their permission. HELOCs are just second mortgages with different name because back in the day "second mortgage" carried negative connotations.
Is that an intro HELOC rate? Yes, after introduction is variable between 3% to 6%.
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investingfan
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Re: Already large home but can we afford this renovation?

Post by investingfan »

Watty wrote: Wed Jan 13, 2021 10:44 am
investingfan wrote: Wed Jan 13, 2021 10:14 am a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses.
What not sell the rental to raise the money you want?

I am not a real estate investor but aren't those numbers pretty bad for a rental property?

We want to keep the rental. Thanks.
exodusNH
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

investingfan wrote: Wed Jan 13, 2021 3:28 pm Is that an intro HELOC rate? Yes, after introduction is variable between 3% to 6%.
You want to find out what the margin is. Your rate is probably going to be prime rate + margin, which could push it to 6%+. 6% after-tax interest is 7.5%+ of investment returns.

Not saying you shouldn't do it, but just to be informed, since you may not be able to renegotiate it when it resets and if you won't have the cash to zero it out, it might hold your primary mortgage hostage should you want to refi.

I was floored when BoA told me they couldn't do better on the rate, even though I told them I would just pay off the balance. The loan office I spoke to -- who was quite nice -- said that HELOCs were in a weird state right now. If I wanted to open a new account, I could get a $100K disbursement at 3%ish, but my $16Kish balance at 6.31% was the best they could do.
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Watty
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Re: Already large home but can we afford this renovation?

Post by Watty »

investingfan wrote: Wed Jan 13, 2021 3:29 pm
Watty wrote: Wed Jan 13, 2021 10:44 am
investingfan wrote: Wed Jan 13, 2021 10:14 am a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses.
What not sell the rental to raise the money you want?

I am not a real estate investor but aren't those numbers pretty bad for a rental property?

We want to keep the rental. Thanks.
With the addition you would have about a million dollars in real estate between your house and the rental property. Between the mortgages on your house, the rental, and a new HELOC you would have about a half a million dollars in debt.

With your income(even with the trust in a few years) that may be too much unless you have a lot of other assets that you did not mention.

There are several variations on the saying, "You can have anything you want but not everything you want." You may want both the rental property and to expand your house but at some point you can't have everything.

I would put the expansion on the back burner until you can pay cash for it.
bloom2708
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Re: Already large home but can we afford this renovation?

Post by bloom2708 »

This could qualify in the "pay cash for your toys" area. But I won't say that.

Ooh. I just did I guess. :D
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fyre4ce
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Re: Already large home but can we afford this renovation?

Post by fyre4ce »

What about a cash-out refi? I bet you can get a rate below 3% on a 30 year fixed.
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queso
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Re: Already large home but can we afford this renovation?

Post by queso »

Dang...I wish I had your contractor where I live. I got a quote on replacing my existing deck with Trex and it was $82k. :(
Planner01
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Re: Already large home but can we afford this renovation?

Post by Planner01 »

Watty wrote: Wed Jan 13, 2021 4:02 pm
investingfan wrote: Wed Jan 13, 2021 3:29 pm
Watty wrote: Wed Jan 13, 2021 10:44 am
investingfan wrote: Wed Jan 13, 2021 10:14 am a rental property out state worth around 320K. Mortgage balance on the rental is less than 50K. Gross rent 24K a year, net 10K after expenses.
What not sell the rental to raise the money you want?

I am not a real estate investor but aren't those numbers pretty bad for a rental property?

We want to keep the rental. Thanks.
With the addition you would have about a million dollars in real estate between your house and the rental property. Between the mortgages on your house, the rental, and a new HELOC you would have about a half a million dollars in debt.

With your income(even with the trust in a few years) that may be too much unless you have a lot of other assets that you did not mention.

There are several variations on the saying, "You can have anything you want but not everything you want." You may want both the rental property and to expand your house but at some point you can't have everything.

I would put the expansion on the back burner until you can pay cash for it.
That’s is exactly what I was thinking. How in the world would be able to afford it on that income? Even the current debt right now seems a lot to carry.
exodusNH
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K. Bought the house early last year at 500K with 20% down 3% 30 year. Lender appraised the house last week 635K. Taking out 50K will be at 3.50% HELOC.
And for your additional consideration, plan for the work to go 20% over budget. They're likely to find something that needs to be fixed (e.g. a rotting sill plate), get surprised by how something was built, or you'll wind up making small tweaks to what you want. Change orders are a contractor's best friend.

You also need to think about the cost of new furnishing as well as additional utility and maintenance costs.

Finally, your property taxes are likely to increase. Not anything life-altering, but something to keep in mind.
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investingfan
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Re: Already large home but can we afford this renovation?

Post by investingfan »

exodusNH wrote: Wed Jan 13, 2021 4:33 pm
investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K. Bought the house early last year at 500K with 20% down 3% 30 year. Lender appraised the house last week 635K. Taking out 50K will be at 3.50% HELOC.
And for your additional consideration, plan for the work to go 20% over budget. They're likely to find something that needs to be fixed (e.g. a rotting sill plate), get surprised by how something was built, or you'll wind up making small tweaks to what you want. Change orders are a contractor's best friend.

You also need to think about the cost of new furnishing as well as additional utility and maintenance costs.

Finally, your property taxes are likely to increase. Not anything life-altering, but something to keep in mind.
Property tax is based on the purchase price. Utility is low due to higher elevation - no summer heat. We harvest your own firewood for heat in the winter about 2 cold months a year. Property insurance is high almost $2500 a year due to constant threat of wildfires.
Last edited by investingfan on Wed Jan 13, 2021 4:56 pm, edited 1 time in total.
retire57
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Re: Already large home but can we afford this renovation?

Post by retire57 »

I'd wait and pay cash.
checkyourmath
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Re: Already large home but can we afford this renovation?

Post by checkyourmath »

Most renovations make their money back almost instantly. You should do it.
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

investingfan wrote: Wed Jan 13, 2021 4:53 pm Property tax is based on the purchase price.
That's fascinating and not how it works around here. You add a new room? Boom. Evaluation goes up, property taxes go up.
Lexx
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Re: Already large home but can we afford this renovation?

Post by Lexx »

In California remodels don't increase your assessment. However a room addition adds square footage and thus that part of the house will receive an assessment and thus a supplemental tax bill (or they may just add it to the bill for the rest of the property).

That's why we bought an older home and then gutted it. We got the house for a song and then remade it into what we wanted. Except for converting the 3 car garage into an office and a home theater, there was no reassessment.
exodusNH wrote: Wed Jan 13, 2021 5:20 pm
investingfan wrote: Wed Jan 13, 2021 4:53 pm Property tax is based on the purchase price.
That's fascinating and not how it works around here. You add a new room? Boom. Evaluation goes up, property taxes go up.
exodusNH
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

Lexx wrote: Wed Jan 13, 2021 5:52 pm In California remodels don't increase your assessment. However a room addition adds square footage and thus that part of the house will receive an assessment and thus a supplemental tax bill (or they may just add it to the bill for the rest of the property).

That's why we bought an older home and then gutted it. We got the house for a song and then remade it into what we wanted. Except for converting the 3 car garage into an office and a home theater, there was no reassessment.
Thank you for the education!
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Re: Already large home but can we afford this renovation?

Post by lthenderson »

Lexx wrote: Wed Jan 13, 2021 5:52 pm In California remodels don't increase your assessment. However a room addition adds square footage and thus that part of the house will receive an assessment and thus a supplemental tax bill (or they may just add it to the bill for the rest of the property).

That's why we bought an older home and then gutted it. We got the house for a song and then remade it into what we wanted. Except for converting the 3 car garage into an office and a home theater, there was no reassessment.
exodusNH wrote: Wed Jan 13, 2021 5:20 pm
investingfan wrote: Wed Jan 13, 2021 4:53 pm Property tax is based on the purchase price.
That's fascinating and not how it works around here. You add a new room? Boom. Evaluation goes up, property taxes go up.
According to California assessment rules, taking a building down to the studs is considered an assessable event which means likely it was done illegally or without the proper permits.
Assessable
[*]Bathroom remodel - the addition of one, or structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or fixtures with upgraded material and finishes
[*]Kitchen - structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or built-in appliances with upgraded material and finishes
[*]Completely renovating a property or portion thereof, i.e. down to studs
[*]Change of use, i.e. converting from industrial to residential use
[*]Upgrading eletrical capacity from 110v to 220v
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JoeRetire
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Re: Already large home but can we afford this renovation?

Post by JoeRetire »

investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K..

Household income total 103K. Spending 65K a year.
Yes you can afford it. Sounds like you have $38k per year to spend on it.
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Re: Already large home but can we afford this renovation?

Post by Carefreeap »

Lexx wrote: Wed Jan 13, 2021 5:52 pm In California remodels don't increase your assessment. However a room addition adds square footage and thus that part of the house will receive an assessment and thus a supplemental tax bill (or they may just add it to the bill for the rest of the property).

That's why we bought an older home and then gutted it. We got the house for a song and then remade it into what we wanted. Except for converting the 3 car garage into an office and a home theater, there was no reassessment.
exodusNH wrote: Wed Jan 13, 2021 5:20 pm
investingfan wrote: Wed Jan 13, 2021 4:53 pm Property tax is based on the purchase price.
That's fascinating and not how it works around here. You add a new room? Boom. Evaluation goes up, property taxes go up.
Actually if you do a remodel down to the studs the assessor can assess "like new". Ask me how I know. :oops:
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Re: Already large home but can we afford this renovation?

Post by Carefreeap »

lthenderson wrote: Wed Jan 13, 2021 6:01 pm
Lexx wrote: Wed Jan 13, 2021 5:52 pm In California remodels don't increase your assessment. However a room addition adds square footage and thus that part of the house will receive an assessment and thus a supplemental tax bill (or they may just add it to the bill for the rest of the property).

That's why we bought an older home and then gutted it. We got the house for a song and then remade it into what we wanted. Except for converting the 3 car garage into an office and a home theater, there was no reassessment.
exodusNH wrote: Wed Jan 13, 2021 5:20 pm
investingfan wrote: Wed Jan 13, 2021 4:53 pm Property tax is based on the purchase price.
That's fascinating and not how it works around here. You add a new room? Boom. Evaluation goes up, property taxes go up.
According to California assessment rules, taking a building down to the studs is considered an assessable event which means likely it was done illegally or without the proper permits.
Assessable
[*]Bathroom remodel - the addition of one, or structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or fixtures with upgraded material and finishes
[*]Kitchen - structural changes, upgrading of plumbing and/or electrical systems, changing the floor plan, increasing the size, replacing cabinets, countertops, flooring or built-in appliances with upgraded material and finishes
[*]Completely renovating a property or portion thereof, i.e. down to studs
[*]Change of use, i.e. converting from industrial to residential use
[*]Upgrading eletrical capacity from 110v to 220v
I just saw your post. I think it also depends on who you get reviewing your permit. My bathroom remodels were done with full permits and were down to the studs. No reassessment in 2014. My family and laundry room remodel was reassessed. It wasn't much but still annoying especially given how much turnover the County was experiencing with long term homeowners moving out. I called the appraiser but he wasn't going to back down. Seemed so petty...
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Lexx
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Re: Already large home but can we afford this renovation?

Post by Lexx »

Not true. The assessor actually walked through the entire house. No change in assessment. Only the theater room and office were added because those were part of the 3 car garage originally, and thus not considered living space. We also built a separate garage which was also assessed.

ALL work was done with full permits. I have the orange permit folder with ALL signatures and checkboxes marked. I personally met with the inspector myself on a few occasions.
lthenderson wrote: Wed Jan 13, 2021 6:01 pm

According to California assessment rules, taking a building down to the studs is considered an assessable event which means likely it was done illegally or without the proper permits.
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Re: Already large home but can we afford this renovation?

Post by Grt2bOutdoors »

JoeRetire wrote: Wed Jan 13, 2021 6:16 pm
investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K..

Household income total 103K. Spending 65K a year.
Yes you can afford it. Sounds like you have $38k per year to spend on it.
Are you sure? I think the $38k difference is taxes and retirement savings. I believe the wiggle room is much tighter.

This is a want not a need. OP - what would it cost to refi the rental with cash out? You have high equity in the property.
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exodusNH
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Re: Already large home but can we afford this renovation?

Post by exodusNH »

Carefreeap wrote: Wed Jan 13, 2021 6:31 pm I just saw your post. I think it also depends on who you get reviewing your permit. My bathroom remodels were done with full permits and were down to the studs. No reassessment in 2014. My family and laundry room remodel was reassessed. It wasn't much but still annoying especially given how much turnover the County was experiencing with long term homeowners moving out. I called the appraiser but he wasn't going to back down. Seemed so petty...
He is king of his very small world.
Carefreeap
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Re: Already large home but can we afford this renovation?

Post by Carefreeap »

exodusNH wrote: Wed Jan 13, 2021 6:39 pm
Carefreeap wrote: Wed Jan 13, 2021 6:31 pm I just saw your post. I think it also depends on who you get reviewing your permit. My bathroom remodels were done with full permits and were down to the studs. No reassessment in 2014. My family and laundry room remodel was reassessed. It wasn't much but still annoying especially given how much turnover the County was experiencing with long term homeowners moving out. I called the appraiser but he wasn't going to back down. Seemed so petty...
He is king of his very small world.
Lol. Thanks for making me smile. Drove me nuts at the time. We are literally talking about a value of $35k and the houses around our neighborhood were selling for a minimum of $1M. :oops: :oops: :oops: My inner "Karen" was starting to come out!
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JoeRetire
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Re: Already large home but can we afford this renovation?

Post by JoeRetire »

Grt2bOutdoors wrote: Wed Jan 13, 2021 6:39 pm
JoeRetire wrote: Wed Jan 13, 2021 6:16 pm
investingfan wrote: Wed Jan 13, 2021 10:14 am We want a new sun room and a new deck. Three general contractors quoted between 30K-40K..

Household income total 103K. Spending 65K a year.
Yes you can afford it. Sounds like you have $38k per year to spend on it.
Are you sure? I think the $38k difference is taxes and retirement savings. I believe the wiggle room is much tighter.
(shrug) I interpreted "Spending 65k" as including everything other than retirement savings (which could be halted). Only the OP knows for sure.
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Olemiss540
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Re: Already large home but can we afford this renovation?

Post by Olemiss540 »

At what amount of debt would you feel "uncomfortable"?

You are fairly well leveraged as it is. I personally would wait until the rental home was paid off or otherwise pay cash for the deck project given your debt to income ratio.
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