Renovations look great on paper – turning them into reality is another matter. With rising material costs and labor shortages, home improvement projects are taking more time and money to complete. Completing a house renovation checklist before getting started can avoid surprises.
Renovating has been all the rage since the pandemic, with spending on projects increasing by 11% in 2021 and 15% last year. Yet projects are taking longer. In 2019, it took just 22 days on average to get a job done, according to Jobber, an industry software service, but in 2023, that average day count has grown to 79 days.
Despite the setbacks, surveys show most American homeowners remain keen to renovate again this year.
Amid an uncertain economy, higher interest rates, and a touch-and-go property market, homeowners seem to be staying put and building up their homes. According to The Hanover Insurance Group’s 2023 Home Buying and Renovation Report, it is going to be a big year for home renovations.
The survey questioned 2,064 U.S. adults (including 1,444 homeowners), and found 61% of U.S. homeowners are planning renovations in 2023. A quarter say they are preparing major projects. They’re also ready to open up their wallets, with 41% of U.S. homeowners budgeting over $50,000.
Yet renovating is not as simple as picking a spot for the pool to go in. Before picking up a power tool and knocking down that wall, it’s best to take stock of the financial side of the project with a house renovation checklist.
Renovations can be costly and require proper planning, not only of the physical space but the costs involved. This article will focus on best practices for renovation finance, including what financial advisors recommend clients do before they start knocking down a wall or putting in a pool.
Home Improvement Budgets
A successful renovation project always starts by tabling costs upfront.
“The first thing I recommend to clients is that they make a plan,” Mike Hunsberger, CFP and Owner of Next Mission Financial Planning.
“They should understand the scope of the job, and whether they have the time, skillset, and money to complete the project,” he adds. “For larger jobs, they should also understand the local building codes.”
Depending on your specific needs, your project will need to consider a range of cost factors. Quality contractors typically don’t charge by the hour, but instead quote for the whole project (usually between 10 – 20% of the combined cost of the project).
Their rates may vary, but as a yardstick measure, hiring a lead contractor will likely cost between $300 to 500 per working day. Additional laborers to help them get the job done will come in around $200 per person.
Every home will be different, but certain project types can help set your expectations. For instance, according to HomeAdvisor, installing drywall usually could cost as little as $2,000, while remodeling a bathroom may cost roughly $11,000. Things get pricey with a home addition (such as a new room or balcony) will cost tens of thousands at a minimum.
Homeowners can cut down on these costs by doing the work themselves. However, they shouldn’t assume that will necessarily make it cheaper. Not only do they still need to buy the materials and tools for the job themselves, but they also need to factor in the time they will sink into doing the project, which could cost them additional income.
Depending on their experience level, homeowners typically move at a much slower pace than a professional, adding to the length of the job.
“Deciding on hiring professionals or DIY depends on how skilled you personally are with home improvement projects and if you want to do them,” says William Nunn, CFP and Founder at Horizon Financial Planning.
“Keep in mind, whatever you do, it’s not a problem you can walk away from. It’s your house, and you have to live with the results.”
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Confirm Your Insurance Coverage
Home insurance is another important factor.
Over one-third of homeowners surveyed by Hanover – exactly 34% – aren’t aware they need to inform their insurance company about a home renovation. Alarmingly, this marks an 8% increase from Hanover’s 2022 survey, underlining the need for homeowners to be informed of how renovations can impact their home coverage in case of a claim.
“If you are doing a big renovation, it’s best to get your home appraised afterward to make sure you have enough coverage to build back what you would lose if you experienced a total loss,” says Nunn.
“You can do this by calling your insurance company,” he adds. “I know some people don’t have their homes re-appraised after a renovation due to higher insurance premiums and property taxes, but it’s probably the best way to figure out how much additional coverage you might need.”
“You should absolutely inform your insurance company if you are going to put in a pool, they might not cover it, and conversely, if they do cover it, then you might be in for a rude awakening when you get your new premium. Call ahead and ask if it will be covered and at what cost. It’s better to go into putting in a pool with your eyes open,” he says.
Renovating a home can be a costly undertaking, and there are many factors to consider.
Homeowners need to factor in the cost of materials, labor, building permits, and codes, which vary depending on the property’s location and the size of the project. Additionally, home insurance premiums may increase with major renovations, and homeowners should ensure they have adequate coverage to protect their investments.
With so many costs to consider, many homeowners find soliciting the guidance of a financial advisor can help them get a better grasp on the project’s numbers so they can draft a plan that fits their budget and goals. With expert help and getting started with a house renovation checklist before hiring a contractor, you’ll be in great shape to make your happy home a little happier.
About the author
Contributing Writer, Wealthtender
Liam Gibson is a Taiwan-based freelance journalist who covers tech, geopolitics, and finance. He has written for Al Jazeera, Nikkei Asia Review, South China Morning Post, Straits Times, National Interest, and has appeared in Fortune Magazine, and several other international media outlets.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
Frequently Asked Questions
Do I need to tell my homeowners insurance company about a renovation?
In most cases, yes. A major renovation can raise your home’s replacement cost, and if your coverage limit isn’t updated you could be underinsured after a loss. Some projects, such as adding a pool, can also change your liability exposure or premium, so it’s wise to call your insurer before work starts and to ask contractors for proof of their own liability insurance.
Are home renovation costs tax deductible?
Improvements to a personal residence generally aren’t deductible in the year you pay for them. However, interest on a home equity loan or HELOC can be deductible when the money is used to buy, build or substantially improve the home that secures the loan, subject to IRS limits. Substantial improvements also become part of your home’s cost basis, which can reduce the taxable gain when you eventually sell, so keep receipts and records of every project.
How should I budget for unexpected renovation costs?
Plan for a contingency cushion on top of your contractor’s quote, because hidden problems behind walls, material price changes and schedule delays are common. Project timelines have stretched significantly in recent years, and delays can add labor costs and extend temporary living expenses. Defining the full scope, getting multiple written bids and checking local permit requirements up front all reduce the chance of a budget overrun.
Will a home renovation increase my property taxes?
It can. Additions, finished basements, new bathrooms and other improvements that raise your home’s market value may lead your local assessor to increase its assessed value, especially when the work requires a building permit. How and when reassessment happens depends on your state and county, so check with your local assessor’s office before a large project if property taxes are a concern.