AAR52 - Financial Realities of Home Improvement

0:00Yeah, and it's not like income has increased to make a$20 ,000 retaining wall renovation, you know, affordable for people or something like that. But yeah, I think that's a good clarifying point that this is just our experience. This is just my wife and I's experience with this home with the things that we specifically need. But for other homes, maybe you bought a resale home or something like that. And there's some big renovation that needs to be done potentially for safety or just a big feature of the home that you really, really don't like up front. And if there's a...

0:39good day everyone and welcome back to at any rate my name is evan ray and we are here to help you make sustainable financial changes without breaking a sweat everyone please give another welcoming round of applause to our resident kimchi hater andrew saither how you doing

0:54Evan:hey man i mean i feel like there's gonna be more people on my side than yours like it's i think there's a very very good chance of that honestly but kimchi is fantastic it's fantastic it tastes fantastic it's fantastic for you it's just a good thing to have i mean it's it's a good thing to just toss into your trash bin when they force it on you when you go get takeout Might as well toss her gut in the trash. Comment below or email us and let us know how you feel about kimchi. I do honestly feel like Andrew would probably win this conversation, but I'm curious nonetheless. I mean, these are people who are trying to improve their finances and do good things for their life.

1:33I think that improving their gut health would be in that conversation as well.

1:38Evan:We also want to have a decent life.

1:45Overrated. Decent life is overrated. All right. Well, today's discussion, as many of you may know, we've discussed it a lot in the past on the podcast. My wife and I bought a home relatively recently. It's now been about nine months or so, nine or ten months since we bought our home. So we're still very new homeowners and everything. and since then of course we've learned the realities of home ownership and the topic around that that we want to discuss today is around home improvement or home renovations anything around that where you're putting money into your home to try and improve it for your own sake maybe for the the sake of the value of the property for reselling in the future but something that you're doing to the home primarily because you want to we're not focusing this around emergencies or things that you need to do to repair something so we're not talking about a roof repair or you know ac goes out or something like that we're discussing how to plan for and deal with the costs that are associated with home improvements which is definitely a very very common thing for people to spend money on for homeowners to spend money on because it's the place you want to live and you want to make it a place that you want to live in and home improvement is one of the ways to do that and for us we definitely like i said learned realities where it was very tough right after the home purchase of course homes are freaking expensive and they're not getting any cheaper over time.

3:10So it makes it even more difficult to plan for other purchases outside of that. But that's what we want to try to help do today. It definitely needs to be planned for. And that's our goal today is to help you figure out what you need to plan around it and how to go through that planning process. And just realize it's a normal part of homeownership.

3:30Evan:And I would also add, it can increase the value of the home when you resell. and that could be something where it's like, oh, it's not just a discretionary expense, but it is something that could increase the value. And it's easy to justify something that you really want to do because it's like, oh, it's going to increase the value. So it's something that you should probably think about because you'll probably come across that idea at least once in owning a home. Yeah, 100%. That is definitely an important part of the conversation and part of the equation when you do the costs around this sort of stuff.

4:08At least our experience has primarily been around doing things that are for our own sake, not necessarily for the value of the home, but when you start doing, especially some of those more expensive renovations that aren't easy for the next homeowner to just say, okay, I want to do this one day. But if it's relatively expensive, then that can be a huge part of the equation for long-term value of the home. But Andrew, since I know you guys also purchased your home new a little while back. What has your experience been since you also got a new build? Have you done any home improvement? Do you have any plans to?

4:40What has that situation been like?

4:44Evan:I'm like super boring about this. We've kept it really simple. I've started to learn about how to repair a dishwasher because for whatever reason, we got a lemon for a dishwasher. But other than that, I don't know how into the detail of what our experience has been. But I really think when you buy new build, it depends what environment you buy into. Because if you're in an environment where the buyers have all the power, a builder might throw more of this stuff in for you. versus if you're in a time or a place where the sellers have all the power, the builders are able to... And you would say too, even existing homes, the homeowners will do less renovation for you if they know they can just put this thing up and people will buy it.

5:44Evan:So it really also depends on what environment you're in when you happen to buy because that's one of the negotiating pieces is things like this. Yeah. And I would also urge you, if you're in that situation of looking to buy a home or potentially buying a home sometime soon, don't be afraid to have those kinds of conversations and discuss those kinds of options and including some stuff in the cost and the purchase price. Because frankly, whether it's a builder or whether it's a family that's trying to move out of a home, whatever it is, they would rather sell that property. That's really their goal is to sell.

6:23Obviously, they need to make money on it. They can't lose money on it, but they need to make that sale. And a lot of times they have enough margin, enough profit to say, if I sacrifice X amount for this additional cost that they're requesting, and I guarantee that I make the sale with this person, that's a lot better and might cost them a lot less than letting it sit on the market for another three months, waiting for somebody else to come around and purchase it as is. So I always think it's very important to kind of look at it from their point of view. And that shows you, you know, what, what kind of power you might have, especially like you said, if it's a buyer's market, if the buyers have the power, then you are perfectly within your rights to request that.

7:01And they are, they may very well be perfectly within their financial situation for that to be their best option. Yeah. Great point. Yeah. Beautiful. So kind of first conversation I want to have here. And I want to preface this by saying that this is not going to be news to experienced homeowners or people that have been living in a home for a long time. But for us, moving from an apartment to a home, we're relatively young. When you live in a home as a kid with your parents or something, you're not really privy to all the homeownership related stuff. And so kind of the first, I guess, culture shock for us of getting a home is just the leveled up costs of everything.

7:39And again, I know that sounds obvious to a ton of people, but for us, that was a really surprising shift. It was something, of course, we learned ahead of time. It wasn't something we learned right after we moved in, but when we started looking into purchasing a home, that was a big change for us. So kind of how I look at it to kind of frame it, going from an apartment to a home, the average life upgrade for something like an apartment, if you want to upgrade your life, live in a better place, you move to a nicer apartment, you pay a little bit more in rent and that is that's basically the whole conversation right there is you move and you pay a little bit more in rent for a home that can easily again to level up your life or give yourself a life upgrade can easily cost thousands of dollars or even tens of thousands of dollars to make the change yourself and that is a lot a lot of money up front whereas the math maybe for an apartment might be you know at least in our area if we look in our area we You probably pay about three or paid about three to$400 more a month compared to worse places that, you know, didn't have nearly the amenities or features in the apartment or whatever it might be.

8:40And you get those features immediately. Of course, you don't have to plan anything and you have low or no upfront costs to make that upgrade for yourself. So, you know, just pick a random example. If you want a sauna, you know, you can move to another apartment that has a sauna for a couple of hundred bucks more a month. and I'm not saying in the long run that's going to work out mathematically, but up front, you don't have to pay hardly anything except for the security deposit that you're probably getting back from the old place anyways. So you just move, pay for moving, and then now you have access to a sauna for just a little bit more a month.

9:14So that was a big shift when we purchased a home where now, at least for us, and this is going to drastically vary depending on what you're looking to do, if you're looking to redo all the floors in your house or something, the price is going to be very different. For us, the average home improvement cost that we've been looking at has been about$1 ,500 to maybe$2 ,000. Again, just kind of looking at making the house a little bit better for ourselves. We're not looking to tear down walls and put up new extensions or something like that. But the little improvements has been about$1 ,500 to$2 ,000.

9:43And again, that is a significant difference in upfront cost than pay$200 more a month to get access to something. And so that requires a lot more upfront planning, a lot more saving. And that's a lot harder to swallow than saying, I bet there's room in my budget for 200 bucks more a month. I can probably make room for that. It's much harder to say, okay, well, now I need to take two grand out of savings. That's a much different conversation. But do you agree with this, Andrew? Has this kind of been your experience, maybe with stuff you've looked at or people you've known have done?

10:14Evan:Yeah, and I would say what you're saying as an average cost for, I know you're saying like minor things, but it's really amazing to me how expensive things have gotten. And I know everybody likes to complain about it, but I heard about a retaining wall costing$20 ,000 to rip down. And yeah, it was like a longer retaining wall, but it's like, man, the cost for labor and expertise and things like that, you'd be shocked at how expensive certain projects are that sound pretty minor. so I think a lot of the things you're talking about trying to get ahead of stuff trying to think ahead can really help because these days stuff's just ridiculous it's kind of blows my mind you know just where things are now yeah and it's not like income has increased to make a$20 ,000 retaining wall renovation affordable for people or something like that but yeah I think that's a good clarifying point that the, that this is just our experience.

11:23This is just my wife and I's experience with this home, with the things that we specifically need, but for other homes, maybe you bought a, maybe you bought a resale home or something like that. And there's some big renovation that needs to be done potentially for safety or just a, a big feature of the home that you really, really don't like upfront. And if there's a big change you have to make, that can easily be 10, 20, $30 ,000 for, for massive changes. Um, Um, so that's, that's kind of sticker shock, but it was also sticker shock to us that a job that, you know, maybe takes an afternoon to do, like, for example, just something that we priced out, probably not something we're going to do, but something that we priced out was, you know, we, we put a garden in the backyard a little ways away and we, we priced out.

12:03okay what would it be if we you know had a brick path laid to back there so we're just talking about you know digging a not so wide path laying some bricks and i know there's a little bit a couple more steps i'm sure in there than than i'm aware of but not a super complicated process easily 1700 to two grand for you know an afternoon of work that is that that's a lot of money for a not so massive job um and it all just scales up of course with the complexity yeah so now i want to kind of touch on how to plan ahead even before the home purchase. I think that's very, very important. Of course, the conversation today is primarily around if you're somebody who's looking to purchase a home or recently purchased a home or something like that.

12:45The conversation, I would say, shifts pretty significantly. If you're a longtime homeowner, you've already been there for five years, the way that you would save up or the things you would think about are going to be pretty different. But just to speak to my experience especially, how to plan ahead even before the home purchase for these kinds of home improvements or upgrades that you want to make. First thing is, if possible, just plan ahead for it. Be aware of what changes you might want to make and just straight up include that in the cost of home. I think the best way to do this is just plan to have some kind of a padding of savings to cover it and then always have some kind of margin on top of that.

13:23You never want to underestimate anything. And I know it's easy, you know, from the third person perspective to say, have a margin on everything that'll always be extra money and be harder to save for. And I acknowledge that, but it is much better to take another month or two to save up a little bit extra margin than to spread yourself thin and potentially be in a scary financial situation just because you scraped it a little bit too close. And a great way to go about this planning process is using some kind of a budgeting spreadsheet, some kind of a home buying spreadsheet. And there are a ton of great calculators available online.

13:57if you want just a free easy to use available one we have one available at einvestingforbeginners.com slash home that's literally the exact same spreadsheet that i developed for my wife and i when we were looking into purchasing a home and that's what we used to plan all the costs ahead of time and spoiler alert it worked out well it saved us through the whole home buying process and we are the proof in that putting ourselves but the best thing to do here is to include the cost of any of those kinds of renovations or home improvements in the closing costs. You basically want to make that a bill for yourself when you buy the home, something that you're not going to negotiate with yourself.

14:34You're not going to figure out later or anything like that. You're just going to include it in the cost of the home and ensure that you have enough savings to cover it. And that forces you to have enough savings to cover it. Then the great thing about it as well is you can make the change immediately after the purchase without any worries. You already plan for it, you're already ready for it, and you can make the change quickly. And first off, live in the home that you want to live in. Potentially, if it's something that you need to get done, again, for safety, structural rigidity, anything like that, then it's something you can deal with right away without putting off dealing with it, which is all too easy to do.

15:09And to kind of be transparent, when we purchased our home, we definitely left padding on top of it, which I'll explain in just a second. But we didn't actually have a great roadmap of what we would want to do. Like I mentioned we'd never owned a home we'd never considered what what we would particularly want what we would be missing we just we didn't have the experience to be aware of it if we went into another home purchase right now we would have a ton of ideas of what would be and wouldn't be important to us and we could make a very thorough list this time around but the first time around we just didn't know what we would want or need and so instead what we did do is we like i said just left margin on top of every planned expense so stuff like pest prevention home inspection the stuff that we knew would have to happen we just left a little bit of padding just just round up on everything and that'll at least leave you with a little bit of padding then we also made sure that we saved about three percent of the home value for an emergency fund and padding included so that was intended to be you know if we moved into it into the home and the second it was our home you know the garage flood or just something crazy happened we had an emergency fund to cover something like that.

16:16Then if no emergencies happen soon after the home purchase, then we left ourselves about 1 % of the home value. So a third of that emergency fund we'd saved, we said, okay, now we can spend it. We'll still leave an emergency fund to protect ourselves if anything goes wrong. But that gave us a little bit of spending money to be able to get some of this kind of stuff done that we knew we would want. Because we went into it knowing that there was something or some things that we would want to do. We just didn't happen to know what they were yet. But the fact that we planned ahead to give ourselves that room to make those kinds of changes was a huge, huge shift for us.

16:54And again, we could have gotten home a little bit sooner, a little bit more easily, or maybe made a slightly larger down payment or something like that if we had scraped by more on this and done exact numbers on all the purchases and left us with no emergency fund or lower one or no padding or something, but that would have made the purchase much less comfortable and made the homeownership process right after the purchase much less comfortable and much less flexible for what we want to get done. We would have been really locked into, okay, congrats, you purchased the home. Now you got nothing left to do anything else.

17:27But what was your purchasing process like, Andrew? Did you guys kind of leave a padding like this or did you kind of do exact numbers with everything?

17:35Evan:Yeah, we had like a starter home. And so some of the equity built into that was able to go towards a down payment and not doing this thoughtfully, but just kind of from a selfish perspective. And this goes against some of the anti-debt crusaders that you have in this space. Was not throwing the entire equity into the down payment and keeping some of it for things like this. This exact situation. And so, yeah, from a net worth debt perspective, maybe you might've been better off from the compounding effect of 30 years on your debt to pay that more towards the mortgage. But this is real life and there are things that will pop up that you're not expecting.

18:25And to your point,

18:27Evan:things you'll want to upgrade that seem minor that you're going to wish you had some cash for. So 100%, I'm... Not realizing that this was something that we had done maybe intentionally, but just kind of wanting to give. If there's a good description of this, it's like a margin of safety. It's a little bit of a margin of safety on the purchase price or on your down payment or whatever that may be. Obviously, if you have the ability to get to 20 % down payment, take off that PMI, that's going to do what you can to max towards that. but anything outside of that in addition to that having this margin that you're talking about and i love this idea of like um three percent of home value i'm curious like how did you come up with that number um was it just like the number just happened to be around what would make sense for you um just curious on thoughts like that because i think it's a really really good idea Yeah, how we landed on 3 % was it was a common figure that we were seeing all over the place to have about 2 % of the home's value saved up ahead of the purchase, but then also ideally annually going forwards, save up 2 % of the home value as an emergency fund.

19:44And then that's kind of a good number to aim for. And I liked it because it's a percent. I think it's important that everything scales up or down. you know if you buy a$150 ,000 home somewhere you probably don't need$20 ,000 in emergency fund spending lying around but also if you own a million dollar home you probably need more than $10 ,000 lying around to protect you so we had seen that two percent figure lying around um as a commonly used figure and so we wanted to uh we wanted to make sure that that was our baseline and we weren't going to plan to go below that but that then anything we had on top of that would give us a little bit of extra spending.

20:19And we felt like that 1 % of the home's value would give us enough that we knew we could get a couple things done, whatever that might end up being. Again, we didn't know what it might be, but we knew we could get a couple things done with that amount of money, but it also wouldn't be so much that it would, number one, either stretch us financially thin or number two, take forever to save up. Sure, it'd be great to have 40 grand sitting around to spend on home improvement, but that just wouldn't be realistic or feasible. and so we had to make it a realistic number for ourselves. Yeah, love that.

20:52Evan:Were there any other things you guys did that helped kind of ease some of this? Mistakes people should avoid, things like that. Yeah, there were a few things that we avoided that made this whole process easier. The first, we definitely avoided planning to go into debt for purchases. You're already going into a ton of debt, of course, to purchase a home and trying to stack more debt on top of that. That's going to be, it's going to be a different loan. It's going to be different interest rates, going to be more than managed. And it's just harder to calculate all of that debt piled up over the long run with interest on everything and successfully plan for that.

21:32So the best thing to do is as much as possible, plan not to go into debt for purchases after the fact. So the one caveat here is if you're able to get it built into your mortgage, then that could be a potential good opportunity, especially if you're getting a good interest rate on your mortgage. So this especially can apply if you're purchasing a resale home. Potentially, you can negotiate and say, hey, I'm going to need to get the garage door redone anyways. Let's include that in the cost, and then I'll purchase the home. That's a great way to go about it. And then it can be included in the sale price, and then you can get a lower interest rate on whatever that purchase might be.

22:07and again this can be necessary i also want to caveat by saying that it can be necessary for stuff like roof repairs or structure repairs those can be very very very expensive and i'm not expecting everyone out there to have 30 grand in savings you know to replace the roof and roof in cash so it's perfectly reasonable to have to take out some kind of a loan or maybe a loan against the equity on the home blah blah blah there's there's options for that um but anything that especially is something that you want and not something you need to do for the home as much as possible, avoid going into debt for it.

22:38I know it might sound easy up front, just like car loans are easy. It's easy to go to Ashley Furniture and buy a$2 ,000 dining table and just pay seven bucks a month on it or whatever it is. That's easy to sign up for and that's the point of it, but it is not good for your finances in the long run. It's just going to make everything more expensive for you and harder to manage. The second thing is to avoid assuming cash flow will cover it. this especially applies if you feel like you and your partner potentially make a good amount of money you're like hey we're good financially we can probably afford whatever we need to afford i think that that that mindset and that assumption up front is very very dangerous and can get you into a lot of trouble again a lot of trouble like assuming that you can get into a car loan because again i make enough money i should be fine without really doing the the deep diving math on it to make sure that you can so again i think that's another example of it's very important to pay everything up front whenever possible and protect you from having to either assume that your cash flow is going to cover it or, you know, maybe tear down your budget just to make this, this one thing happen for you.

23:45And then the last thing I want to make is, or the last mistake that we avoided is going crazy all at once. Again, it's easy to, you know, buy a new home and say, we're going to do, you know, X, Y, Z, A, B, C, D, E, just to make it, make it our own and have a ton of fun and blah, blah, blah. And if you plan for it ahead of time, of course that can be fine, but I think that it's easy to not be able to hold yourself back and do too much. And the issue with this is it just opens you up to, to surprises or to emergencies. We all, we talk about a ton, always having a margin of safety, always having an emergency fund, always having some kind of safety net, financial safety net for yourself.

24:20And if you now own a home, then I would say that, that only scaling up that emergency fund or that padding behind you is very, very important because now you've basically scaled up the, the likely or potential cost of any emergencies that might pop up. And if you move into a home and say, we're going to redo all the floors, we're going to repaint the whole house. We're going to fill it all with new furniture. We're going to, you know, extend the back patio. We're going to do all this crazy stuff. And we're going to use all of our savings to do it. Then after you move in, you have a small leak, even a small leak, you know, cost you two grand to repair or something.