Looking for some financial and real estate advice

[Suz D]

Hello oh wise Budget boarders. I have a question about putting an addition on our home. Just a tiny bit of background information.

About 4 1/2 years ago we moved out of our dream house so my husband could take a faculty position at another University. The town we moved to has a much higher cost of living and we didn't want to buy more house than we could afford. We bought a home in a great neighborhood but it's always felt like we were moving back into a "starter" home. I just turned 50, my husband is 47 and we have 2 daughters ages 16 and 6. It's been hard for me because our previous home had room for overnight company and parties (both of which are important to us). That fills you in on the emotional part of our dilemma.

Both of my parents have passed away since we moved and we inherited a fairly large sum of money. We paid a decent sum on our current mortgage and refinanced down to a 15 year (which we still have about 12 years left on due to bi-weekly payments). We are comfortable financially and our retirement is fully funded as are educational needs for our kids.

We really want a house that will bring us more in line with our previous dream home. We could just buy a different home, but we have 2 high schools in our town so we'd be restricted by that since we have a junior in hs. I also have to say that we've moved 8 times in our married life and it honestly makes me sick to my stomach thinking about the stress of packing up everything (I have a home based business with lots of inventory etc.).

We absolutely LOVE our neighborhood, it's just the house that we're not so wild about. We have a tiny upstairs with three bedrooms right on top of each other, a little family room in the basement, a laundry room that also serves as a guest bathroom, and a decent kitchen but one with contractor grade cabinetry and appliances.

We'd like to put an addition on our home which would add a bedroom (master) on the main floor which would be great as we age, a laundry room making the bath/laundry room into just a bath, plus a family room beneath the addition and extending our walk out basement. I don't know if we want to finance the addition by having a monthly payment taken out of our investment account (taxable account) or just take all of the $ out for the addition and pay cash. That's the first question that I'd like your opinions about.

My second question is this. We would definately become the largest home in the neighborhood. We just added a third stall to our garage and the addition would put about another 1200 square feet onto the house. I've heard that you never want to be the largest house in the neighborhood for resale purposes, but we intend on staying in this house long term, paying it off quickly, and then when we sell it or pass away, although we may not get what we have in the house, we wouldn't have a mortgage to factor in. We paid $225,000 for the house and the addition will be about $150,000 making our investment in the house $375,000. That's on the low end for a nice home in our town, but definately on the high end for our neighborhood. What do you think about having a home that's definately expensive for the neighborhood?

Advice? Opinions? Suggestions? I'm open to what you have to say (of course keeping in mind that I really would throw up if the majority of you say "move").

 

[Teresa Pitman]

I have a good friend who did something rather similar to their house, except theirs was three floors: they added a family room to the basement, expanded the kitchen and put in a laundry room and bathroom next to the kitchen, and a master suite on the top floor. That was about 15 years ago now. They still absolutely love it. Yes, it is the biggest house in the neighbourhood (they also have the biggest lot) but since they knew they planned to stay a long time they weren't worried at all. And the family has enjoyed the house so much more with the additions.

TP

 

[RitaE]

I think you need to answer the question of whether your primary view of your house is an investment, or whether your primary view of your house is "home you enjoy."

If you search around the internet you'll find all kinds of articles advising you to never do this or that in home improvements because you'll never make it back in resale. I feel that type of thinking always totally negates the value of what type of enjoyment people get out of living in their homes. I think this is especially true in terms of a house you plan to live in for years and decades.

Who knows what that neighborhood will look like in 20 years? Maybe all the home around you will be torn down and McMansions built. LOL

 

[dawnball]

How many more years do you think it will be before you have to give up your new "dream home" for your husband to take a job at another university? Does he have tenure? Is he happy? How stable is the chair of his department? Are they near retirement? Did you intend to live in your last house until you died, and then life interfered?

You're not going to get back what you put into the addition. You'll probably get less for the house when you sell it than you would if you could plunk it in another neighborhood where it's not at the top of the range for that area. If you're ok with that - go for it.

Be aware though that remodeling projects of this scale are -more- stress than moving. The budget tends to increase as you find more "little things" to do as part of the upgrade. You don't want to cheap out because you'll be living with it forever. You're still going to have three little bedrooms upstairs. You haven't talked about gutting the kitchen (even though you imply you don't like the contractor grade cabinets). Living without a kitchen for a month because your contractor takes that long to gut and rebuild is hard. Your inventory is going to be covered in drywall dust. Make sure you're going to love what you get enough to live with the hassle.

You can make moving easy. Hire someone to pack your stuff and unpack it on the other end. It's not cheap, but it would probably cost you less over time than you'll lose on the remodel.

As for pulling all the money at once vs a monthly payment out of an investment account... Uninvested cash in an investment account isn't going to earn as much interest as you're going to pay on a loan. Investments may or may not. It's not always a good time to sell, but if you have to have the money to make the payment, you're stuck selling anyway. Do you have the cash flow to make those payments for awhile if it's not a good time to sell? Do you have an asset that's spinning cash into the investment account, so it's a matter of just not reinvesting? Market timing is everything with investment accounts. It's also impossible, and this will make it harder. Buying another house vs remodeling this one isn't going to change the difficulties of deciding which pile to withdraw money from.

 

[scrapquitler]

Hello oh wise Budget boarders. I have a question about putting an addition on our home. Just a tiny bit of background information.

About 4 1/2 years ago we moved out of our dream house so my husband could take a faculty position at another University. The town we moved to has a much higher cost of living and we didn't want to buy more house than we could afford. We bought a home in a great neighborhood but it's always felt like we were moving back into a "starter" home. I just turned 50, my husband is 47 and we have 2 daughters ages 16 and 6. It's been hard for me because our previous home had room for overnight company and parties (both of which are important to us). That fills you in on the emotional part of our dilemma.

Both of my parents have passed away since we moved and we inherited a fairly large sum of money. We paid a decent sum on our current mortgage and refinanced down to a 15 year (which we still have about 12 years left on due to bi-weekly payments). We are comfortable financially and our retirement is fully funded as are educational needs for our kids.

We really want a house that will bring us more in line with our previous dream home. We could just buy a different home, but we have 2 high schools in our town so we'd be restricted by that since we have a junior in hs. I also have to say that we've moved 8 times in our married life and it honestly makes me sick to my stomach thinking about the stress of packing up everything (I have a home based business with lots of inventory etc.).

We absolutely LOVE our neighborhood, it's just the house that we're not so wild about. We have a tiny upstairs with three bedrooms right on top of each other, a little family room in the basement, a laundry room that also serves as a guest bathroom, and a decent kitchen but one with contractor grade cabinetry and appliances.

We'd like to put an addition on our home which would add a bedroom (master) on the main floor which would be great as we age, a laundry room making the bath/laundry room into just a bath, plus a family room beneath the addition and extending our walk out basement. I don't know if we want to finance the addition by having a monthly payment taken out of our investment account (taxable account) or just take all of the $ out for the addition and pay cash. That's the first question that I'd like your opinions about.

My second question is this. We would definately become the largest home in the neighborhood. We just added a third stall to our garage and the addition would put about another 1200 square feet onto the house. I've heard that you never want to be the largest house in the neighborhood for resale purposes, but we intend on staying in this house long term, paying it off quickly, and then when we sell it or pass away, although we may not get what we have in the house, we wouldn't have a mortgage to factor in. We paid $225,000 for the house and the addition will be about $150,000 making our investment in the house $375,000. That's on the low end for a nice home in our town, but definately on the high end for our neighborhood. What do you think about having a home that's definately expensive for the neighborhood?

Advice? Opinions? Suggestions? I'm open to what you have to say (of course keeping in mind that I really would throw up if the majority of you say "move").

I am definitely NOT an investments expert. Personally I would add onto the house and make the house work for my family and not be overly concerned about being the biggest house in the neighborhood (some house has to be, right?) because you have no plans to move any time soon. If you said that you want to move in 5 years, then it would be different...but if you plan to be there for another 20 years, you might as well make it the way you want it. Just my opinion.

 

[timmac]

I think you need to answer the question of whether your primary view of your house is an investment, or whether your primary view of your house is "home you enjoy."

This. If you're not looking to move any time soon, then "resale value" and the like are all pretty meaningless figures.

As for whether to pay cash or finance the new addition, it's a harder question to answer. It would, for me, depend on the interest rate of the potential loan, and your reasonably expected return rate of the investment account. If the rate of return on the investment account (minus any taxes you'd owe for said return) is greater than the interest rate of the loan, then I'd go for the loan. Your personal level of risk tolerance may say differently.

 

[Suz D]

How many more years do you think it will be before you have to give up your new "dream home" for your husband to take a job at another university? Does he have tenure? Is he happy? How stable is the chair of his department? Are they near retirement? Did you intend to live in your last house until you died, and then life interfered?

You're not going to get back what you put into the addition. You'll probably get less for the house when you sell it than you would if you could plunk it in another neighborhood where it's not at the top of the range for that area. If you're ok with that - go for it.

Be aware though that remodeling projects of this scale are -more- stress than moving. The budget tends to increase as you find more "little things" to do as part of the upgrade. You don't want to cheap out because you'll be living with it forever. You're still going to have three little bedrooms upstairs. You haven't talked about gutting the kitchen (even though you imply you don't like the contractor grade cabinets). Living without a kitchen for a month because your contractor takes that long to gut and rebuild is hard. Your inventory is going to be covered in drywall dust. Make sure you're going to love what you get enough to live with the hassle.

Keep the ideas coming. Just quick answers to the questions you posed so that people have information they need to provide advice.

We did intend to live in our last house forever until life interfered (long story, but you seem to understand academia so the short version is he was denied tenure after getting a positive vote from the department, college, and dean then it was denied at the University level). His current job is very secure. He's tenured and was just promoted to department chair which puts him on a 12 month contract instead of a 9 month contract (essentially 3 months additional pay). He is definately happy in this job and it's a great fit for him (he works directly with the FBI and military so proximity to DC is great).

Your second point about getting out of it what we paid for it is a great on that we've been wrestling with. We are pretty positive we won't get out of it what we paid for it. The housing market here never really had a downturn so prices have continued to go up, but I would highly doubt there would be any way we'd get that much out of it. While we're looking at our house as less of an investment and more a place to call home, we also don't want our kids to have to unload a house that is difficult to sell because it's just too big for the neighborhood.

Remodeling the kitchen is a project that probably will never happen. I don't LOVE the kitchen, but it's totally fine and on the surface looks very nice. If we ever did remodel it, we'd wait until both girls are out of the house (so at the very least another 12 years).

Our contractor quoted us $100/sq foot for one level and a little less for the second level. At $100/sq foot that puts us at $120,000 so I'm planning on $150,000 so that we have some wiggle room.

Thanks for the good advice so far. It's good to get unbiased points of view in this situation. Keep the opinions coming.

 

[sk!mom]

We were in much the same position several years ago- neighborhood we loved and no plans to move for at least 20 years. We took the plunge and remodeled our home realizing that if something happened in the first 5 years or so post-remodel we would not be able to recoup our cost. We wanted to stay put though and have the home that we would really enjoy.

One thing we did to make up our mids was to seriously look in to moving. A part of the deciding factor was that we could not find an existing home that was perfect either. They would have all required some work to make them perfect.

Good luck deciding!

 

[manateesmom]

So long as you're aware you may lose the money associated with the reno, and are okay with it, make the house what you want. I'm in a similar position, our house is biggest with most "add-ons" in the neighborhood, but prior owners made some weird decisions (tens of thousands on landscaping, but crappy kitchen). We feel like we want to update some things, but every penny we spend will be "lost" from an investment perspective, because we're in a subdivision and average home prices are really close no matter what features/updates the house has. Might make the house sell faster (not for more money), and will make life more comfortable now. So long as you know you'll be "losing" money that you can't recoup when you sell, then go ahead and make it your home.

 

[mikehn]

On the one hand, mortage rates are at historic lows. Lenders are basically letting you use their money for practically nothing. If there was ever a time to borrow money for home improvements, now is it. On the other hand, sounds like you are financially set and the cash you have on hand is collecting dust under your mattress. If that's the case, then just pay cash for your addition.

I think its ok to have the most expensive home in the neighborhood, so long as it is not grossly overbuilt. Adding 1200 sq ft doesnt sound that big a deal. Another thing to consider is that the size of your lot supports the addition. You dont want to be in situation where you have a small lot with a huge home on it.

 

[Suz D]

On the one hand, mortage rates are at historic lows. Lenders are basically letting you use their money for practically nothing. If there was ever a time to borrow money for home improvements, now is it. On the other hand, sounds like you are financially set and the cash you have on hand is collecting dust under your mattress. If that's the case, then just pay cash for your addition.

I think its ok to have the most expensive home in the neighborhood, so long as it is not grossly overbuilt. Adding 1200 sq ft doesnt sound that big a deal. Another thing to consider is that the size of your lot supports the addition. You dont want to be in situation where you have a small lot with a huge home on it.

Our house is about 2300 square feet now so it would add a little more than 50% to our home size. Lot size is a great point as well. We have just over 1/4 acre so I think we'll be okay, but that is definately something to keep in mind.

I love the Budget Board! Thanks to all who have responded. If anyone else wants to put in their two cents, it's very helpful to our weighing of the pros and cons.

 

[dcfromva]

Suz D,
Do you plan to live in the house while they build the addition? I can't imagine that living through a project as big as what you are suggesting would be any easier than packing up and moving.

Have you done any house shopping with a real estate agent to see what type of inventory was available with your wish list in mind?

( You sound like the perfect candidate for the TV show, Love it or List it. The good thing about that is you only have to look at 3 listings before you make your decision. )

 

[Suz D]

Suz D,
Do you plan to live in the house while they build the addition? I can't imagine that living through a project as big as what you are suggesting would be any easier than packing up and moving.

Have you done any house shopping with a real estate agent to see what type of inventory was available with your wish list in mind?

( You sound like the perfect candidate for the TV show, Love it or List it. The good thing about that is you only have to look at 3 listings before you make your decision. )

This is also a really good point. I may have to start a thread for those who have done a big addition to see if they would do it again or if was just too stressful.

I completely understand where you're coming from on that stress but I kid you not, I can't imagine it being more stressful than packing up and moving again, plus trying to find something with our view, nice neighborhood, and same school district. Although that sounds like I've made up my mind, I think that if the right home was available for less than what it would cost to add on to ours I would consider it. We do have a realtor we trust and could work with.

 

[dawnball]

The housing market here never really had a downturn so prices have continued to go up, but I would highly doubt there would be any way we'd get that much out of it. While we're looking at our house as less of an investment and more a place to call home, we also don't want our kids to have to unload a house that is difficult to sell because it's just too big for the neighborhood.

In the vast majority of markets, houses will sell. It's just a matter of putting the right price on it.

The big question for me would be "If life came and bit us in the behind again - could we get out without losing more money than we've already put into it?" Which is really "Are houses in the neighborhood selling for the total we'll owe (current mortgage plus $150K) plus 6% commission?"


As an aside, I'm highly amused by 1200 square feet being a "not a big deal" addition. The house we sold to move to CA was 1235 square feet, and the three of us currently live comfortably in less than 1100 square feet. Everyone needs the space they need, and I'm not saying you don't need it. I'm just giggling about my entire house being an easy-add-on.

 

[bjscheel]

I know what you mean- your house sounds a little like ours. I don't know if it is considered 1½ story or 1 3/4, but our three bedrooms are all upstairs, very close, and the roof line starts to taper off the edges of our rooms. The ceilings are not high to begin with. So yes it starts to feel cramped. When the girls were little it was nice to have bedroom doors so close, now that they are teen/tween it's a little too close for comfort. Our house is 1400 sf in all. Originally our laundry room was a bedroom, but that room is also the only access to the only bathroom! Didn't want everyone traipsing through our bedroom so we are upstairs.

So we have tossed around the idea of adding on a bedroom downstairs. On one hand, in only 7 more years, the girls might be both gone to college (maybe). On the other hand, in a house you intend to spend the rest of your life, a main level bedroom is a good idea. I keep telling DH I don't want all our money tied up in a house- but this thread has got me thinking how nice that add-on would be! I wonder what it would cost to add it on. (DH would do the majority if not all of the construction himself- okay that's another negative because he'll want me to help and I HATE working on home projects- I don't know what I'm doing!) So even one room add-on will be stressful!

For us moving is SO not an option. We got this house so cheap we could never find something like it again. We have 5 acres, a barn with various and sundry items, a shop- full of guy stuff, a garage, a semi, a big tractor, several small tractors- there is no way we want to move all that

Is there any of your add-ons you could live without and make it not so much bigger than the neighborhood houses?

 

[girli565]

If this is your long-term home and you don't care about resale value because it's more important to be comfortable in your home than I say do it! Especially because you don't plan on selling any time soon the addition would be the smart idea.

Now, the question as to whether to make payments or take out the cash... I'm no financial expert so I really don't feel comfortable answering.

 

[Suz D]

For us moving is SO not an option. We got this house so cheap we could never find something like it again. We have 5 acres, a barn with various and sundry items, a shop- full of guy stuff, a garage, a semi, a big tractor, several small tractors- there is no way we want to move all that

Is there any of your add-ons you could live without and make it not so much bigger than the neighborhood houses?

This is also one of the factors for us. This is a nice house for the amount we paid for it. If we factor in the addition, the total cost we'll have in the house will be around $375,000 (unless the addition comes in at less than what we've budgeted for and that is possible, though not probable). For that amount of $$ we could not get the same amount of square footage unless it was a home that needed some work or was in a very crowded newer neighborhood with the houses right on top of each other.

I've thought about having less than that much square footage in the addition as well. I could leave our current laundry room as it is and make just a 1/2 bathroom in the new addition. My big issue with our laundry room is that I just hate having people over on laundry day because if anyone needs to use the bathroom, it bothers me. The new 1/2 bath in the addition would solve that problem. My thought process is that by putting in a new laundry room, I could take the washer and dryer space from the old laundry room/bath and make it a wall to wall closet area where I could store the appliances that don't really have a home in my kitchen.

I guess maybe one of the unsaid things I've come up with through processing this whole situation with all of your help is that I don't want to come across as ostentatious (in the neighborhood, not here LOL!). We're pretty down to earth, we don't drive fancy cars, and try to be generous with giving to others. We just like a lot of space to entertain, have lots of out of town friends who we'd like to have stay with us when they are in town, and my home business is currently displacing my family (I teach scrapbooking and cardmaking classes in our home and the new addition would also give space for that rather than meeting in our living room.


And finally, the other unsaid thing is that I just have way too much stuff. There are lots of things that I could get rid of which would help. Instead of Love it or List it, I probably just need Clean Sweep to come in and help! But that still would not create a master bedroom (or any bedroom) on our main floor which I think would really be nice as we get older. That's one of our biggest priorities.

As an aside, we're not big TV watchers, but it was so cold this afternoon that I wanted to sit in front of the fire and work on my crocheting. I turned the TV on and Love It or List It was on. I'd never seen it and watched 2 episodes back to back. What a FUN show!! I really want them to come handle this for me.

For my fellow Disboarder from CA...I totally get why you think this is funny! We lived in a 600 square foot apartment for a long time and then lived in 900 square feet after that. At that time I would have been thrilled to have 1200 square feet total. Our last home was about 3700 square feet with 4 bedrooms and a play room. It was so fabulous.

We've been having to postpone our meeting with the contractor for two weeks now, once due to an emergency on his end and once because Halloween was postponed due to Sandy and was rescheduled for our meeting time. We're due to meet with him next week just to get a better estimate. He may tell us that to put a master bedroom/bath/walk in closet, laundry room, and storage closet would not be 600 square feet (the other 600 square feet would be in the basement and we can't add onto the main floor without adding onto the basement) which could help.

 

[Suz D]

The big question for me would be "If life came and bit us in the behind again - could we get out without losing more money than we've already put into it?" Which is really "Are houses in the neighborhood selling for the total we'll owe (current mortgage plus $150K) plus 6% commission?"


As an aside, I'm highly amused by 1200 square feet being a "not a big deal" addition. The house we sold to move to CA was 1235 square feet, and the three of us currently live comfortably in less than 1100 square feet. Everyone needs the space they need, and I'm not saying you don't need it. I'm just giggling about my entire house being an easy-add-on.

I don't think we could get out of it what we'd have into it, but we'd probably be able to get out of it for what we owe. This is also a really great point. Thanks for posting it.

 

[tcufrog]

I can understand not wanting to move. Your kids though this time are old enough to help with the move and if you're thinking long term it might be better to find a house that will eventually have better resale and will be better configured for the future. I'm not a big fan of moving but in your case I would consider it. It doesn't hurt to look at real estate listings to see what's out there before you start on a major remodel. I would also see what sort of rates you qualify for for a refi loan and a new mortgage. Those rates might help you make the decision. I would try to avoid getting the money out of your retirement fund. You never know what the future might hold. For example, something may occur that makes it necessary for your dh to retire early.