You've probably heard the stories: Someone buys a dilapidated house for a song, invests a few thousand dollars in materials, spends weekends sanding and painting and voila -- a showcase home worth several times its original price.
Then there's my house. The renovation project begun 15 years ago by previous owners is still not done.
Renovating a house can pay off nicely, but it takes a lot more planning and patience than you might think. Before you jump into a remodeling project, consider the pros and cons.
• You can build equity quickly. Projects that enhance the "curb appeal" of your home, such as adding an extra bedroom or bathroom, may increase the value of your home by more than the cost of the project.
• Your profit may be tax free. If you own and live in your house for two of the five years before you sell it, you can pocket up to $500,000 of gain on the sale ($250,000 for single taxpayers) without paying a penny of capital gains taxes. You get the break without having to "trade up" or reinvest the proceeds in another house. Some enterprising -- and handy -- people have made renovation into a career. They move into rundown houses in good neighborhoods, fix them up, sell them for a gain and move on to the next house.
• You can enjoy your investment. Unlike stocks and bonds, which don't do much for your quality of life until you cash them in, an extra bathroom can benefit your family and enhance the value of your home.
• You can cut the cost of renovation by pitching in. Your "sweat equity" in a home improvement project can boost your profit. Even such simple things as cleaning up or washing down walls can help.
• You have to get involved. Unlike sending a check to a mutual fund, investing in your home requires your active participation. Approving the plans, hiring the contractors, arranging the financing -- there's plenty to do even if you don't pick up a paintbrush.
• You take a risk. Rain can turn your foundation into a mud hole, a small electrical job can become a total rewiring project, and a traffic re-route can make your home less appealing and your profits on resale go up in smoke.
• Your life will be disrupted. Chances are you'll be living without water or a kitchen or crammed into a different part of the house during part of the renovation. Can your nerves take it?
.... And Avoiding the Ugly
• Choose your home wisely. "Location, location, location" may be a cliche, but it's still the best advice when buying a home. Thoroughly research the area -- make a list of more expensive, less expensive and comparable houses and figure out what attributes makes the costlier homes in the neighborhood worth more. Is it their square footage, number of bathrooms, the landscaping?
• Hire a professional home inspector to perform a careful examination of the house and grounds before you buy.
• Prepare a detailed budget. Consult pricing guides for remodeling and repair projects such as Interior Home Improvement Costs and Exterior Home Improvement Costs by R.S. Means.
• Know your town's building regulations, especially if you are renovating an older home. According to Old House Journal, many areas go by the 25/50 rule. If you spend more than 50 percent of the replacement cost on the renovation, the whole building must be brought up to code; if you spend 25 percent to 50 percent, the areas being remodeled must meet the standards of a new building.
• Shop around for financing and lock in the best deal before you start.
• Adjust your homeowner's insurance. Ordinary insurance typically won't cover the extra cost of restoring an old or unique house to its original glory in case of disaster. Old House Journal recommends you get policies like those underwritten by Chubb and Fireman's Fund that are intended for that type of property.
• Avoid the gotchas that can turn your dream into a disaster. Don't overbuild for your area or sink your money into a project that is too personal or peculiar. You may think a hot tub in the middle of your bedroom is a great idea, but few potential buyers would agree.