When Home Renovations Become Dangerous to Your Finances

Home renovation and home projects represent one of the largest hidden dangers to achieving financial goals and dreams. When folks make mistakes in this area, the embarrassment that follows often prevents others from learning from home renovation dangers.

One of my biggest personal finance regrets I’ve made was not giving my family a larger budget when buying our first home. I’ll share some personal stories along with some general tips on how to prevent your next home renovation project from becoming a home renovation nightmare.

How a home buying budget mistake led to a major home renovation

When we were looking for our first forever home as a family, I wanted to stay below the $750,000 limit so we could take out a doctor mortgage on the full amount with 0% down.

The doctor mortgage was a great decision. We got a 2.75% fixed rate and nearly maxed out our mortgage interest deduction.

The problem was that I was fixated on a tax deduction instead of thinking about the huge expenses I had just committed my family to due to buying an older home instead of one more fully renovated.

Lesson #1: If we had purchased a newer, more “finished” home, the substantial uncertainty we walked into when we bought our home would have been greatly reduced.

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Scope creep when renovating your home is real

The final amount we spent on our home renovation was multiples of what we had intended.

This is in part due to discovering things we didn’t know about once hammers started swinging and we were past the point of no return. And also because we started saying to ourselves, “while we’re at it, let’s do this additional XYZ thing.”

Luckily we could afford to take the hit on these decisions and surprises, but I suspect most families need to tap financing or cut off desired changes to their renovation scope when surprises hit.

Here’s an example: once we had decided to add a room and after we had removed all the trees in the area where the addition would go, we discovered that the entire street drained right into that spot. It added a huge amount of cost to the addition.

Lesson #2: It’s probably smarter to look at upgrading to a different house if you’re going to substantially change the footprint of an existing home.

The interest rate can drive you to make dumb decisions

My wife and I didn’t want to lose our 2.75% interest rate. But letting that low rate drive our decisions ultimately cost us a lot more money than if we had just upgraded the home and borrowed at 6% instead.

Just as in student loans, you don’t want your mortgage interest rate to dictate your decision-making when it comes to doing a major home renovation.

It might make a lot more sense to buy a new home at a higher interest rate instead of spending potentially way more money trying to make your existing home into the one that you want.

Lesson #3: Don’t let your low interest rate keep you stuck. Look at the overall housing expense as percent of income in a new home and compare it to your current one.

Make sure all home contractors you use are highly rated and have experience in the types of projects you assign

I’ve had great luck hiring highly rated contractors from google search research.

But when it comes to larger or specialty contractors, you may or may not be able to find a high number of google reviews — simply because they work with fewer clients.

So, how do you decide which contractors to use when doing major home renovation projects? It starts with doing your homework and setting clear expectations from the beginning.

Like with any service, take your time and shop around.
Be really specific about your project scope so you’re comparing apples to apples when reviewing quotes.
Bring in a designer or architect to draw up detailed plans — having as exact specifications as possible means you’ll get a more realistic bid instead of a rough estimate.
Hire contractors with lots of experience with projects of a similar dollar amount and complexity.

Why home renovations can be budget busters

I always joke with clients that you can drink Starbucks coffee until your liver fails, and it won’t meaningfully impact your projected retirement date.

There’s only so much coffee a human can consume.

But in contrast, housing expenses can grow exponentially over time. Rising costs are usually a direct function of how old your home is, how large it is, and how difficult it is to make repairs.

For example, in an extreme case where you own a historic home, you might be limited to only a few contractors who know how to fix it. You may also need costly and time-consuming approvals from historic district permitting boards.

Or if your home was built during the asbestos era of the 70s or earlier, you could start renovation only to discover you need to spend four or five figures hiring one of the few approved asbestos removal companies in your area — and you’re out that money before even starting on the renovation itself.

Without revealing any confidential details, we see clients all the time spend six figures in unexpected home repairs and renovations.

Many times, these repair expenses will not be recaptured on a home sale, either. Home buyers tend to not care if you had to rip out all the cast iron plumbing because it was constantly clogged. They’re just going to see the rooms and they might test to see the toilet flushes.

You can still renovate, just do it from a place of strength and decide if other goals are more important

To close out this article, I don’t want to scare you away from doing a home renovation.

I merely want to point out that it’s the kind of expenditure that gets glamorized by hour-long HGTV shows that make it look easy, enjoyable, and exciting.

In reality, you’re living through dust, displacement, unexpected surprises, constant communications with designers and contractors — and it can put strain on budgets and even relationships.

Once the project is done, it might be totally worth it. But you don’t want to add in financial stress on top of all the other stress if you decide to take on a major renovation.

Make sure you have plenty of cash and a substantial line of credit ready to go before jumping into the project.

It would also be a good idea to look over your projected retirement date with your financial professional or on your own to see what if any impact you might have on when you can reach financial independence.

If you’re about to take on a major home renovation project, you should consider how it fits into the context of your other financial goals.

You could do it on your own or ask your favorite GPT about it. But if you want expert guidance on one of the most important financial decisions you’ll ever make, consider working with a fiduciary financial planning firm like SLP Wealth.