Terry Gerton Well, as we’re entering the summer, for reasons good and bad, many federal employees may have more time on their hands at home and they may start looking around and deciding that home improvement is the way they want to spend their summer. You’ve got some interesting ideas for us this morning. What are the sorts of things that you want folks who are considering home improvements to start with?
Thiago Glieger When we look at our home, Terry, that’s really our castle. It’s our place of tranquility, where we really come to relax with our friends and family. And so before you commit tens of thousands of dollars into something like a renovation, you want to think about, is the upgrade actually worth the cost? Is it worth your time? And so there’s a handful of categories that if you’re going to go to resell the property, you get a really good value increase to your house and you get to recover a lot of those costs. And then there are some categories of renovations that you might love it, but when you go to sell the house, you might not exactly get that money back when you sell.
Terry Gerton As a former homeowner, I think I’ve probably been on both sides of that picture. Let’s start with the kinds of improvements that really add value.
Thiago Glieger So one of the most exciting for people is the kitchen, right? The kitchen is the heart of the home. And so there are a lot of different ways to approach a kitchen renovation. And most of the time, if you’re sticking between that $30,000 to $50,000 kitchen renovation, which can be pretty expensive, that’s when you’re really getting the most return on investment, or we call that ROI. Close to 70% of that value that you’re putting in there can be expected in terms of adding that back to the value of the house. Plus, you get to enjoy it and really make use of the space and have that sense of tranquility. Now, the key thing in the kitchen is sometimes it’s hard. If you’re going to do a full gut of the kitchen, $30,000 is, I mean, around here in DC, it’s probably not going to cut it, right? Depending on the size of the home. And so as you start to creep into these higher-dollar kitchen renovations, you’re going to start to see that 70% return go down and down. And before you know it, you’re getting less than half of the money recovered once you sell the house. So you just want to be careful with that.
Terry Gerton That’s a good point. And there are some other aspects that you suggest, internal and external to the house.
Thiago Glieger That’s right. I think the bathrooms are another really, really good one. It’s a very strong value-add. The average return on the investment is right around 60% of that value per bathroom, somewhere between $20,000 and $30,000. So we’re thinking, you know, like modern tiles, things like that. Stay away from the gold toilets, right? Those are the ones that are typically going to push your costs way high. And just like the kitchen, as you start to creep into these really, really expensive fixtures, your next buyer is really not going to be looking at that. We have to remember that when we sell a property, there’s something called the comparable sales in the area. So no matter how high and expensive you’re paying for your bathroom, if your home is not within the price range that every other house in the area in the neighborhood is sold, you’re going to have a hard time recovering some of that cost.
Terry Gerton And externally, how do people think about things like decks and barbecues and outdoor kitchens? They look great in magazines.
Thiago Glieger They really do, Terry. And this is an interesting one because decks don’t really add to the livable space. You can’t add square footage unless it’s enclosed. But if you think about the kinds of memories and really the enjoying of the fruits of your labor, that’s really what life and financial planning is about. How do we meet good financial decisions with happy life decisions? A deck can be really interesting. You can get somewhere between 60% to 70% of that investment recovered upon the sale of your house. Again, it depends on how much you’re spending on that deck. Further things outside, if you’re doing the siding replacement with stones, this one blew my mind. This is close to 90% of your value replaced, as long as you’re not spending tens of thousands of dollars. The outdoor kitchen gets a little tricky because you already have a kitchen inside. And so the outdoor kitchen is extremely expensive. And going back to the comparable sales, if you put $80,000 into an outdoor kitchen, can you sell your house for $80,000 more? How much higher can you go compared to the highest sold home in your neighborhood?
Terry Gerton I’m speaking with certified financial planner Thiago Glieger of RMG Advisors. All right, so the first thing to think about is whether or not you’re going to get value out of it, either in the resale or in your own personal satisfaction. I guess the second thing to think about it is how are you going to finance it? What recommendations do you have there?
Thiago Glieger So the best thing for federal employees to consider financing, the best method to be thinking about this, Terry — I like to see people using cash, okay? If we’re going to create debt on our balance sheet, we want to make sure that we can afford that debt. However, there are ways to consider using debt in the form of a home equity line of credit, a HELOC. This is a very popular option for a lot of federal employees. Although like any tool, you can use it the right way and you can use it the wrong way.
Terry Gerton So tell us more about the right way and the wrong way on a home equity line of credit.
Thiago Glieger So there’s some interesting times to consider a HELOC. The first is if you have to do, let’s call it a $100,000 renovation on the home, and you’re going to take that money from the traditional TSP. $100,000 that you need in your bank account is going to come with a big tax bill. We think about federal taxes, if you live in a state that has state taxes, suddenly $100,000 may have turned into $120,000, $125,000, $130,000. Plus, if you’re still working and earning an income, what bracket did that put you in, if you take that all out in the same year? If you’re on Medicare as a federal employer or Tricare for life, you’re on Medicare Part B, right? Your premiums might have increased as a result of that, capital gains might have gone up. So we need to be cautious of that. And sometimes using a HELOC to fund yourself avoids a lot of those tax bills. So that could be one good reason. The other is, what if you’re going to do your renovation and the market decides to crash right before the reno? Well, first question is it’s still a good idea to do that, right? But second question is, do you want to sell the investment at a loss? By taking the money out of the market, you lose the opportunity of having that money to regrow. So that could be a substantial cost as well. And another one, this is actually the more common one. If you’re going to buy a house or you’re going to acquire another property, but you haven’t sold your house first, how do you come up with the down payment? If you’re going to get a loan or a second mortgage on the mortgage for the new home, those are very expensive. There’s tens of thousands in closing costs. So you might consider the interest on your HELOC for maybe four to six months as you sell your house. That might be a whole lot less than taking cash from the portfolio with taxes or paying tens of thousand of dollars for closing fees for yet another mortgage on the home. Those are some interesting ways to think of it.
Terry Gerton So there’s a lot of considerations there, how much you’re currently earning and what’s the opportunity cost, if you take it out of your TSP, the interest costs in the HELOC. As folks are maybe considering this, maybe they’re in do-it-yourself mode, maybe they are going to hire someone, but how do you think about integrating the cost of home renovation into your overall financial planning strategy?
Thiago Glieger The best way to think about that, Terry, is to recognize that cash flow is the heartbeat of retirement. In other words, the ability to continue to pay for those things over time, either in maintenance or the HELOC payments, or just using that cash out of your portfolio, can you still meet your cash flow needs for day to day? We might get really excited about a renovation, but if that creates a cash flow crunch 10 or 15 years from now, because maybe we didn’t have as much money growing for us in our portfolio, now we’re not outpacing inflation as much. So that’s the first and most important way to consider that is, are we able to fund our lifestyle, adjusted for inflation, for the next 10, 20, 30 years of retirement? With that first in place, then we can start thinking about, okay, are there other ways that we want to use the money that might upgrade our lifestyle?
Terry Gerton Are there any particular cautions you might have for folks who are considering this? I mean, I know there’s always a rule of at least getting three estimates if you’re going to have someone come and do the work, but oftentimes that estimate is just a starting point.
Thiago Glieger There’s a lot of different ways to be thinking about these projects. The first big pitfall is the idea that your quotes, they usually never tell you about the surprise expenses that come around, right? And so demo day comes around, the walls start coming down and oops, there goes 15% more in your project budget. So we’re always telling clients, make sure you put that money aside so you don’t get surprised. As you mentioned, getting multiple quotes is critical. You have to do that to get a sense for what your project is going to cost. And then the other thing is just consider other things. So a pool, for example, very expensive, very exciting, but there’s other costs beyond just the maintenance, like insurance. In the financial planning industry, we call that an attractive nuisance. If someone gets injured or worse in your pool, it doesn’t matter if you have a gate, a fence, signs, and you make people sign liabilities contracts, you’re still going to potentially be liable for that. So have you increased your insurance costs around that? And these are some hidden costs, I would say, that people often don’t think about.
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