Disclaimer: we’re not realtors. Just a couple of home-happy millennials. This is not professional advice – simply an experience worth sharing.
Making money on our first home was an accident.
We were living in a quaint little apartment, bursting at the seams with a passion to host all the parties. But we simply didn’t have the space to accommodate more than 5 humans at a time
Not to mention the monthly rent check going to nowheresville. No equity. No ownership. No means to an end. Doesn’t sound like a good investment to me. Where’s the return? I guess we didn’t have to mow a lawn. Or fix our appliances when they keeled over. Or pay a property tax.
But what about creating a sense of home?
Making a house a home.
We NEEDED to customize. To personalize everything in sight. To learn the ways of the DIY master, and then to actually DIY a few home projects. Custom decor. Beautifully executed interior design.
The space just wasn’t ours. We could paint the walls, but we were required to repaint them back to builder-beige when we moved out. Well, that’s discouraging. And if you rip out any part of the carpet with dreams of installing hardwood or tile, say bye-bye to your deposit.
Losing our minds.
We were stir crazy. Cooking wildly creative feasts for two. Refinishing granny’s antique loveseat on a 4 foot by 6 foot third story outdoor deck. Sharing our only bathroom’s porcelain throne with every new friend we did end up hosting. Our hard-earned money funding another shiny diamond stud in the ring of our landlord. We wanted out.
So we visually inhaled every home buying TV show until our eyes bled and we dreamed in real estate jargon. Aggressively saving our disposable income was our obsession. 40 home viewings later, our realtor probably wanted to quit and move to Alaska. Well, that’s only half true. She very graciously and thoroughly showed us everything the burbs had to offer, patiently awaiting a juicy commission check.
Homeowners, finally.
Within 9 months, my wife pulled out all of her hair as a healthy expression of frustration with the duration of our search. Then she leveraged her newly founded, bald-headed ET powers to land our first home purchase! Highly accurate details aside, we were overjoyed to transition from renters to homeowners.
Here’s what we learned about resale value in the process. We’ll share our sharply honed marital conflict resolution skills in another post titled “Home Renovation is Free Marriage Counseling”… just kidding. That’s not an actual post (yet).
The best home buying advice we ever received.
- Buy the worst house in the best neighborhood you can afford. (You’ve heard this before, but let’s break it down into tangible advice.)
- Put 20% down to avoid paying Private Mortgage Insurance (PMI).
- Hold until the market swings upward.
- ONLY renovate areas that increase the value of your home.
To clarify, the “worst” means very poorly designed & dated cosmetic shape. Think: well worn hardwoods that can be refinished, wildly creative paint colors, disgusting carpet (ours was riddled with cat feces), unspeakable fragrances, decades-old builder grade kitchen cabinets, laminate or tile countertops, grungy sinks & toilets, itty bitty fiberglass shower inserts – you get the picture.
However, make sure it has… dare I say… good bones (*gasp*). As radically overused and misunderstood this phrase may be, it’s essential that all of the floor / ceiling joists, studs, rafters and any key pieces of the home’s structural integrity are in excellent condition if you’re not an experienced renovator or residential contractor. A house without good bones is what glistening, celebrity renovationistas usually call a “money-pit”.
Here’s the strategy. Buy a house that…
- Is UGLY but can be cosmetically renovated to be beautiful (think new flooring, painting walls and cabinets, cleaning). Basically, filter it through this lens, “Can I take this house from unwelcoming to cover of a magazine with mostly elbow grease and a little bit of learned skills?”
- You can snag for a steal of a deal because of said ugliness. You’re looking for a house that you can get for a much lower price than comparable, prettier houses in the neighborhood. A good exercise is to make a list of all the fixes and changes you want / need to do and estimate how much they will cost you. Subtract this from the estimated post-renovation value of the house. This is the number that you should absolutely not go over.
How to get a better ROI.
Don’t make the mistake of getting emotionally invested in a house or caught up in the back and forth of negotiating so that you pay more than the house is worth. Remember, you make money when you buy a house, not when you sell it.
There is nothing you can do when you sell to make up for overpaying when you buy.
This strategy positions you with more equity, a far greater ROI when you sell, and a vast majority of DIY projects you can tackle without paying a contractor your firstborn’s birth-right (i.e. a stupid amount of money).
Does location actually matter?
You’ve heard it before: location, location, location.
Why? The location, the lot size and in some cases the layout are the ONLY things about a house you can’t change. If you buy a house that has the perfect paint colors, the updated kitchen and the space you want, but it’s in a less than desirable neighborhood – there is nothing you can do to improve the house that will change the neighborhood.
Here is the strategy that we used to make sure we bought for location: we learned from our realtor which areas / neighborhoods hold their value best. Then narrowed our search to only those specific areas that fit the criteria AND were within our price range. Our realtor digitally sent us every single house that came up for sale in those areas. In person, she only showed us the houses that truly had massive potential.
We had it narrowed down to one specific neighborhood that was somewhat within the price range we were comfortable with AND had extremely good resale value. Our home search took a while. About 9 months to be exact. But in the end we would rather spend 9 months searching and make $100k when we sell versus buying quickly and risking low ROI. Wouldn’t you?
Lesson learned. Short term patience for long term gain.
Private mortgage insurance (PMI).
Investopedia says it’s usually 0.5% to 1% of your whole loan amount per year. The lender is trying to protect themselves from you not paying your mortgage. Theoretically, if you have less than 20% of the value of the home in cash, then you’re more likely to default on payments.
On a monthly basis, PMI slowly chips away at your future ROI when you sell the house. If we put 10% down on a $200,000 house, our PMI could be up to $1,800 per year. And if we held the house for 5 years, that’s $9,000 unto nothing. It’s essentially rent on top of your mortgage.
The only obvious caveat: we would need to put down $41,000 on that home instead of $20,500. Our mortgage payments would be much lower due to the greater amount down.
It’s conservative advice, we get that. But if you can reign in your spending habits now to start socking away the cash you need to save up that 20%, it will only serve you well in the long run. It may take you an extra year or two to begin your home buying process, but you will be in better financial shape when you do. Plus, your extreme savings season may prepare you for unknown future seasons.
Here’s another financial tactic we used. Set your price range based on what you can afford to put 20% down on instead of what the bank says you’re “approved for.” If you find there’s nothing in that range that will work for you, or the location that does work isn’t ideal, put your search on hold and save like mad until you get there.
Our home buying financials.
We bought our first home in 2012 for $205,000. It was a 2,400 sq ft short sale. After fixing it up (mostly) ourselves, we sold it for $313,000 in 2016. That’s a $108,000 profit.
The best accidental, slow-flip decision my wife and I have ever made. All thanks to HGTV, DIY podcasts, YouTube, very helpful friends and the handiest neighbor / mentor you’ll ever meet.
So how do you make $100,000 on the sale of your first home?
If you bought a cosmetic fixer-upper in a quality neighborhood, offered a 20% down payment to avoid PMI, positioned yourself or your family to keep the house for 2-10 years to allow the market time to increase the value – then it’s time to talk renovation.
The two areas of your home that have the greatest potential to increase your overall home value are the kitchen and the master bathroom. However, this is a general guideline, not an absolute truth. Let’s think about renovation strategically. We’re going to work backwards to help you earn the most possible money. It all starts by avoiding capital gains tax.
A note on capital gains tax.
If you buy a home and sell it in under 2 years, you will owe the IRS part of your profits. Welcome to wild world of capital gains tax.
According to nerdwallet, capital gains tax rates for 2018 range from 10% to 37% depending on your tax bracket, based on your income. Exclude this additional tax by making this house your primary residence for at least 2 out of the last 5 years of owning it.
Why holding your property matters.
Where does the 2-10 year range come from? Investopedia found that median home prices increased an average of 6.4% per year from 1968 to 2004. Here’s the general rule: if you hold your house for long enough, it will appreciate in value.
However, due to the volatility of the market, home values fluctuate from year to year. If you bought in 2006, you most certainly would not want to sell it in 2009. You probably would’ve lost a lot of money. Ideally, you hold the property until the market recovers so you can break even OR wait a few additional years until your home is worth more than you bought it for. 10 years roughly estimates the amount of time it takes to recover from a massive dip in the market.
In the S&P/Case-Shiller U.S. National Home Price Index, the FRED reveals that if you bought a house in the US in 2006, it’s likely you recovered your previous value by 2016. The Great Depression and the 2008 Recession may not be commonplace, but it’s wise to be prepared to hold a minimum of 3-5 years. 10 years in cases like these.
On the flipside, if the market swings upward 2 years after you buy your house, then you’ll want to be ready to sell. Don’t wait to renovate if you have the dispensable income. Always be prepared for the upturn. And renovate the areas that add the most value to your home. We bought in 2012 and sold in 2016 after our home increased value by 50%.
Enough about cap gains and value appreciation. Let’s get to the fun stuff.
The two most important areas to renovate.
If your home is in a neighborhood, consider if the other comparable homes have an updated kitchen AND updated bathroom. If they don’t, then reconsider your plan to renovate these spaces – you’re over-improving for the neighborhood. If you spring for hardwood floors or granite countertops in the kitchen, but all the other houses have vinyl floors and laminate countertops, you won’t see that money back in the sale of your home.
What buyers are paying for the majority of other similar homes in your area, they’re going to pay for yours. Regardless of your upgrades. This is a good conversation to have with your realtor. Consider checking out comparable homes in your neighborhood that have sold in the last 6 months on zillow or realtor.com. Look at photos. Read the descriptions.
Are your personal touches losing you money?
Renovation ROI tip #1. Don’t buy a home that you can’t improve on.
Renovation ROI tip #2. Don’t buy a home and renovate areas that your future buyer won’t pay for.
I know, I know. That cramps your creative style. Hinders your ability to do exactly what you want to do to your house, everywhere where you want to do it. If this is your one-and-done house, your finale, the spot you plan to retire – then have at it.
But if you’re aiming to sell at some point, and hoping to make a profit on the sale of your home after getting out your creativity, then we need to focus on marketability. NOT personalization. Personalize the decor you can easily change or remove. Pops of color in pictures, throw pillows, furniture, window treatments and go a long way. Don’t put in red granite countertops if you’re not planning to live in this home for the next 20 years.
Will you or your contractor renovate your space?
When you forecast renovation ROI, you need to factor in who’s doing the reno. Is it you and your friends or family? Are you opting out of the DIY game and acting as a project manager, directly hiring subcontractors to do the work? Or are you hiring a licensed and insured residential contractor to handle the entire project?
Various approaches to home renovation that affect your ROI:
- All DIY.
- Pros. Save the most money. Possibly yield the greatest return.
- Cons. It takes longer, sometimes way longer. Without being trade savvy, you risk unfinished projects and needing to outsource. Quality can suffer without a meticulous approach to learning, practicing and executing. Mistakes can be very expensive.
- Mixture of DIY + outsourced help.
- Pros. Know your limitations. Humbly accept where you’re skilled and where you aren’t. You tackle what you’re good at, and delegate what you’re not good at. The outsourced projects get completed very quickly, accelerating your overall renovation without dramatically increasing the cost.
- Cons. You’re not just paying for parts and supplies. You’re paying a labor cost to each outsourced tradesman or handyman. Your budget will need to expand a little. Big mistakes are still very costly.
- Hire handymen.
- Pros. You’re the project manager, hiring out non-licensed handymen to complete all of your renovation projects. No middleman to pay or communicate through. Cheaper than hiring licensed subcontractors, and much cheaper than hiring a contractor. Usually much faster than doing every project yourself.
- Cons. Less cash earned than DIY. Not all handymen are skilled or experienced – a huge monetary risk you take when avoiding subcontractors. Find handy people you trust and who have proven themselves to be top quality and provide quick turnaround time. They may or may not be up to date on building code or regulations.
- Hire subcontractors.
- Pros. Your outsourced professionals are licensed, which usually equates to highly skilled and very fast at what they do. You manage the subs, the timelines, and sometimes order the materials and supplies if needed. No DIY necessary, but you’re still hands on with scheduling and communication. Subs should fix their mistakes if any arise.
- Cons. More expensive than a handyman. Much less return than DIY. You’re managing various tradesmen, which can cause the same headaches as managing handymen.
- Hire a residential contractor.
- Pros. With a top-notch, licensed and insured R.C., your project will get done the fastest and at the highest quality. The contractor handles the planning, all communications with subcontractors and strictly follows building code. If you don’t have the headspace, time or interest to be involved at every step, then this is your ideal choice. The hands-off approach to home renovation. When mistakes are made, the R.C. takes full responsibility for each of them.
- Cons. The most expensive option by far. You’re paying the R.C. who then needs to pay subcontractors. R.C.s often manage multiple projects at once, leaving subs without supervision for part of the project.
The most important conversation you need to have.
There’s one person you must talk to before you buy your cosmetic fixer upper and renovate it. Your realtor.
You’re probably laughing at the ridiculousness of that statement. “Of course I’m going to talk to my realtor before buying my house… he’s the one showing me every potential purchase!”
Here’s the deal (figuratively). Unless you’re a real estate expert or home renovation professional, you’re probably going to buy a home that already looks pretty and makes you feel all warm and fuzzy. “Feels good” usually translates to “no room for value-adding improvements”.
Find the best realtor in town.
You must, and I repeat, MUST, vet your realtor thoroughly.
You are looking for someone who is willing to help educate you on the overall market, specific location of the house / neighborhood and the history / condition of the house. Someone who is willing to show you many, many houses until you find the one that makes sense, listen to what you actually need and search for that. If they try to figure out how to sell you on every house you tour, then it’s time to find a new realtor.
A wise, seasoned and non-salesy realtor can cut through the home searching emotions with numbers, strategic reno opportunities and projected ROI. Don’t buy with your “heart”, buy with your “head”. Your home should have the potential to be beautifully designed and up-to-date.
After you make a well-informed home purchase, do another walk-through with your sage of a realtor. Invite him/her over before you change ANY changes. Based on comparable properties in your neighborhood and area, (s)he’ll offer a list of updates you can make to increase the value of your home.
If you guess which projects are most profitable, you’ll likely end up losing money or lessening your return when you sell. Don’t guess. Don’t gamble. Get advice from a pro.
Now go buy yourself a house. Or fix-up yours.
Now you’re a little more knowledgeable than you were 5 minutes ago. It’s time to do something with it. Go buy a house. Or strategically renovate the one you currently own.
You don’t feel ready yet? To be expected. This is a learn-as-you-go investment. Here are your essential action items to get ready.
Action items.
- Realtor. Find an incredibly wise and selfless realtor. Preferably one that has experience with foreclosures, short sales, flips and investment properties.
- Strategy. Discuss your goals with your realtor. See for-sale homes through the lens of ROI, asking him/her 100 questions per house. Or do a renovation brainstorming walk-through with him/her in your current home.
- DIY. Plan and execute a small home project. Test your limits and natural abilities. Take Home Depot how-to classes, watch countless instructional videos and find a friend to teach you new trades and skills. As you get more comfy with DIY, you’ll know what to tackle on your own and what to outsource.
But I’m nervous…
Nervous? I was too. Before we bought our first house, I didn’t know how to use a cordless drill. My painting skills were reminiscent of kindergarten art class. I thought “realtor” was spelled with two e’s. ROI stood for “reposted on Instagram.”
If Liz and I can do it, then you can DEFINITELY do it. Have at it, friend. In the meantime, here are a few DIY home project ideas for a little practice:
- Laundry Room Renovation Reveal & 9 Step-by-Step Tutorials
- How to Make DIY Shiplap.
- How to DIY Install Floor Tile.
- How to Make & Install DIY Stained Wood Shelves.
- How to Change a Wall or Ceiling Light Fixture.
- How to Build & Install a Sliding Barn Door.
- DIY Restoration Hardware Copycat Headboard.
- DIY Herringbone Headboard.
- Custom Calligraphy Wall Decor.
- Centerpiece Pallet Wood Box.
- Homemade Fire Pit.
- Rustic Finish For Your Reclaimed Table.
- Installing Laminate Flooring.
- Paint, Stain, Whitewash & Distress Your Farmhouse Table.
- DIY Entryway Organizer.
- How to Clad with Pallet Wood in Your Kitchen.
- How to Install a Solid Wood Range Hood Cover.
