The money trap!

July 23, 2004 11:16 AM

Home renovation: quick road to profits, or a disaster-in-waiting? If you have experience or advice, please come inside..

I've got a lead on an old heritage home. It looks like the frame is in good shape, though the roof looks like it may need replacing (it seems to be saggin). The inside is in pretty lousy condition, with shabby cupboards, shabby finish, shabby flooring, etcetera. The house is large, and appears to have been a two-parter, a substantial addition being added some time after the orginal building. Swimming pool out back looks to be in good shape, though, the yard is a large corner lot, and the neighbourhood is quite and appears to be headed towards revitalization. House cost will be < $140k, recently reno'd home a block away is>$260k.

So I'm thinking that with a year or two of mainly self-done work (I do believe I'll prove to be a competent craftsman) the place could be reselling for around $300k.

My first guesstimate of reno costs gets up $50k-75k. The place will need a roof repairs, new appliances, new counters & cupboards, flooring work, possibily new pipes & wires, all new windows, walls knocked out, etc. I'd have to contract out the roof & cabinets, most other stuff I can do the majority of the gruntwork myself (I've laid tile, laminate floors, done basic wiring, hammered studs, etc.)

So with any luck, this place could turn us a $300-$140-$75 = $85k profit. And IIRC, capital gains on a primary home (ie. we'd have to live in it for a while) are tax-free in Canada.

Could this work? Could I actually make money doing renos? Would I learn enough that I'd save boodles of money when I build my own home after fixing up this one? Would life be a living hell for the time we're doing renos? Should I be running, running away from this idea? Will it pay off nicely?

Of course, none of you can answer those with any sort of guarantees. So I'll take the next best thing: your experiences and thoughts!

Thanks in advance...

posted by five fresh fish to home & garden (18 comments total)

Think you may have answered your own question w/ the more inside. A house inspection is $100 to $200 in Dallas Tx. Talk to the neighbors about the home because if there is a reason this home is a “money pit” they may be the ones you can find it out from.
posted by thomcatspike at 11:36 AM on July 23, 2004

http://www.houseinprogress.net/
posted by SpecialK at 11:50 AM on July 23, 2004

One key question is, "Are you going to live there while you're working on it?" If this is an investment, where you'll be living somewhere else while you fix up this place, it could definitely be doable. I've got a couple friends who make good livings doing just that. (Although the tax situation, at least in the US, is much different in that case, and not nearly as advantageous as it is for your primary residence.)

If you're planning on living there while you do the work, then good luck--your SO had also better be _very_ excited about the idea as well, and very patient. Definitely get the "minimum requirements" taken care of professionally, before you move in, and keep a stash of wine and flowers hidden for every time the toilet explodes, or you can't get around to fixing that window again before it rains.
posted by LairBob at 12:17 PM on July 23, 2004

_{Oh, I guess you kinda answered that already. In that case, gooood luck!}
posted by LairBob at 12:19 PM on July 23, 2004

Never underestimate the psychological burden this kind of thing can be if the rest of your life gets a little hectic. That can take the edge off of possibly making money a few years from now. On the other hand, don't underestimate the pride and self-satisfaction that comes from doing things yourself and wading through projects that other people call you crazy for attempting. That can take the edge off of possibly NOT making money a few years from now. I've been through both. The best advice I have is, once you ensure it's a sensible risk, you need to really like the house as you're living there, or else you will hate this undertaking in a way that $1,000,000 won't compensate for.
posted by dness2 at 12:22 PM on July 23, 2004

Oh, and hire someone else to do wall-boarding. Definitely not worth it to do that yourself.
posted by dness2 at 12:27 PM on July 23, 2004

Hire professionals to do anything that must be done quickly or accurately -- the stuff you can't afford to have messed up. As for the rest, I say go for it. I'm a little leery of the fact that the house has an addition, but that's just personal prejudice (seen lots of evil leaks because of additions).

A thought: try to do insulation early, if you can. You don't wanna be stuck with nothing but lath and wiring between you and the winter weather.

...also, your S.O. will be more likely to accept minor inconveniences if they're nice & comfy, rather than freezing. In fact, if you can wrangle it, try to completely finish off one room, so you'll have a sanctuary.
posted by aramaic at 12:38 PM on July 23, 2004

I should mention that I hadn't planned on restoring the thing to old-time looks: I want a modern kitchen & open floorplan, not the old farmhouse many-walls format.

I just remembered that I have probably 30' of self-sticking industrial zipper, used for making "doorways" in plastic walls. That could be a lifesaver: trap all the dust and crap into whatever area is being worked on. Or keep it out of the bedroom, whatever.

Biggest advantage to this project, other than the supposed profit, would be the adventure and learning. It'd keep me mighty busy. I figure on doing a webpage on it, with lots of how-to details et al. Might as well make it possible for everybody to learn!
posted by five fresh fish at 12:45 PM on July 23, 2004

To get an upper end on the cost, price out what it would cost to have pros do everything. I'd make sure that I'd be comfortable with it costing near that much. Even doing it yourself it'll cost a lot more than you think, and will be a loooot more work than you think. But also it could be very rewarding. Our house is not a fixer-upper, it's sort of a normal house it's age (15 years) but we've been doing a lot of updating and upgrading, and certainly it's very nice to do the stuff yourself. Just saved a boatload on wood floors. Much cheaper than paying someone to do it, but not as cheap as the pen-and-paper calculations said it should be. Let's not talk about what it would cost if you add in what I bill myself out for per hour.
posted by RustyBrooks at 12:51 PM on July 23, 2004

Consider taking a general contractor course in night school. On a job like this knowing which permits you'll need, when you need to get inspected and how to cost out your projects are going to be critical to your budget (and sanity). A good GC course will teach you all of these things and you should be able to get the basics in 3-4 mo.

If you do it right, you may even be able to write off the course cost as professional expenses. You probably also want to talk to a tax accountant (which shouldn't cost too much either).
posted by bonehead at 2:06 PM on July 23, 2004

I see I forgot to mention: I know several people who do exactly what you're proposing, buy, invest sweat equity, sell at profit with no capital gains. You have to be willing to be rootless and live with the hassle of always being under construction, but you can make a comfortable side income this way. If you're really quick and the market is good, this can even be a primary source of income---I know one couple for whom renovation is her full time job, his income (less than hers) provides the reno capital.
posted by bonehead at 2:11 PM on July 23, 2004

You know the Steven Wright joke "this is George Washington's axe--I had to replace the handle, and later the blade, but it occupies the same physical space."? I've got a couple of friends whose house is like that. I've been watching their progress (and marvelling at their energy) over the past year or so as (with little outside help) they added a room, redid all the interior walls/wiring/plumbing/HVAC, put on a new roof, etc. For the past year, this has consumed all their free time--never see them at parties or anything. They're just about done (with a baby due in about a month). I've also known couples who have embarked on rehabs and never (I mean, like, 10 years later) never finished, and have been using a slop sink in the garage all that time because they have no kitchen.

So, my point is, be honest with yourself about how dedicated you can be to the project. I think its a great idea if you can pull it off, and admire the dedication.
posted by adamrice at 2:28 PM on July 23, 2004

Consider taking a general contractor course in night school.

Oooh! What a great idea!

Market here is very good. That same house in good shape would immediately sell for $250k or better right now. (Which I personally think is outrageous, but that's what the market is paying and I don't think it's going to take a tumble. Geez. Quarter million for a home? My first home as a kid cost $17k. Ack!)

After doing the full reno, I expect I could then go about building my next house, with a very good idea of how to do it well. That'd be very cool, and where I want to build next will, over the next 30 years, undoubtedly turn into million-dollar estates. Hell, some are already a half-mill.

There's also another old heritage home just around the corner that will be coming onto the market. I could actually afford to purchase *both* of them, live in one while reno'ing the other, then vice-versa... which in the end might net me a shitload of profit.
posted by five fresh fish at 4:24 PM on July 23, 2004

Gratuitous self-link, only because it's a project of about the same scale as yours. My then girlfriend, now spouse and I bought a 1.5 bedroom house and turned it into a studio apartment while in the process of turning it into a 3 bedroom house with twice the square footage. For this work we used a contractor for all the important stuff (foundation, carpentry, plumbing, electrical), and we did all the paint (in and nearly all of the out), tile, finish carpentry, and the drywall in two rooms. I need to point out that I am a moderately skilled woodworker and general handyman/person/being, but had only done small projects in comparison (built 5 or 6 pieces of furniture and a deck).

All said and done, it cost us less than $100/ft², which is way less than the going rate in this area. The assessed value is more than we put into it including the purchase price, but we also played some screwy financing games. (I just cut out a few paragraphs of fluff regarding financing games we played to make this happen ask and I'll go into detail).

It was a metric buttload of work and I'm glad that it's nearly done, 5 years later (more later). Both of us learned a lot in the process including, and most importantly, how to work together and how our communication changes as we get tired or excited. My spouse wants to do this for a living, but in this area I think we're on the wrong end of the real estate curve to start now.

When I say nearly done, we're about 95% done with everything and the last few tasks have been complicated by daily life, although we're making progress. It will never be completely done, but that's part of owning a home.
posted by plinth at 6:27 PM on July 23, 2004

I'm asking, I'm asking! Especially if these are financial games that will work in Canada.

The five year timeline scares hell out of me. Eek.

Where are you located that the market is heading down?
posted by five fresh fish at 6:53 PM on July 23, 2004

Could this work? Yes, it could.
Could I actually make money doing renos? Yes, you could, but most people don't.
Would I learn enough that I'd save boodles of money when I build my own home after fixing up this one? Possibly, but renovating and building a home from scratch are very different animals. You will develop general skills that are usefuly, though.
Would life be a living hell for the time we're doing renos? Yes, it wll be an absolute hell, so be prepared for it.
Should I be running, running away from this idea? No, but you should give it very very serious thought because, once committed, you are stuck with it, unless you want to take a bath selling a half-renovated house.
Will it pay off nicely? If you do the job right, particularly in terms of renovating the house with an eye to resale rather than doing it the way you would want it. Spend some time looking at similar houses for sale if you can find them and consider what is popular as opposed to what you like personally. You need to think of it as if you are renovating the house for someone else to avoid building something that you love but that has limited appeal in the marketplace. If you are renovating an older house, consider whether you would be better to do it more in the style in which it was build, rather than modernising it (which may save you tens of thousands of dollars) - have a look around and see what others are doing and how the sale prices compare.

A couple of (obvious) things to keep in mind are that everything will cost far more than you expect, will take far longer than you expect and most things will not turn out exactly the way you expect them to. Also, be mentally prepared for setbacks and obstacles, because they will come at you thick and fast.

Good luck!
posted by dg at 9:27 PM on July 23, 2004

I've done this for three houses now. Our current one is a two flat, which is nice (tenants take care of the mortgage, we take care of fixing the place up).

I've noticed that my friends who have wanted to do the same thing seem to buy a place get started and then never finish. If you (or your wife) can keep things moving along and you enjoy working on houses, it (so far) can be a really good investment.
posted by ugf at 6:37 AM on July 24, 2004

Initially we were going to pay for most of the house out of pocket and then take a loan for the addition. Instead we put the absolute minimum down and took out Private Mortgage Insurance (PMI) and paid for the addition out of pocket. When the addition was done we had another assessment done and the house value was now so great compared with the purchase price that the PMI was cancelled. Why do it this way? It turned out to be cheaper by a few thousand dollars during that time period. I don't remember why this would be the case, but when I played with a mortgage interest calculator, it helped a lot.

Don't be spooked by the 5 years thing. That has to do with being human. The core construction and most of the finishing took less than a year. We started the demolition in the late summer and the contractor finished the punch list in January. We played a lot of games with what was to be done and not done in ordr to save money. For example, we wanted a fireplace, but the cost of the unit was not in out budget, so instead we had them frame for the fireplace and the flue and we saved up for it and had it done last summer, the mantle a few months later. We had framing and wiring put in for a whole house fan that we put in later. We had two rooms left unfinished -- just bare studs and insulation -- but purchased the sheetrock for the task, or more precisely had the contractor purchase the sheetrock at his discount and had it delivered and placed in the rooms. In 2002, we rented a lift and hung it, taped, mudded and painted.

All those things have a constant theme: we planned larger than our means with the notion that they would be finished later when we had the means, and we've done well at following up on those tasks. Things have slowed down because of having a daughter and suddenly the overhead of tasks increases because you can't leave a task partly completed and partly cleaned up, so putting polyurethane on the mantle is daunting because it has to be prepped and cleaned up three times (once for each coat) and not prepped once and cleaned up completely some three weeks later.
posted by plinth at 11:57 AM on July 24, 2004