I'm surprised that in nine months the construction budget hasn't increased.OP here, 9 months later.
We are still very focused on doing this renovation and have met further with the architect and builder over the last few months. We would appreciate any other perspectives on our plans:
Recap / Update:
40/41 with one 4 year old; would like to retire by 60
Net Worth: $4M
House: $2.5M ($980k remaining on mortgage at 2.75%; $4,500/month)
Emergency Fund: $100k
Cash: $100k
Taxable: $625k (selling would result in approx $70k cap gains tax)
Retirement: $1.5M
529: $225k (we consider this fully funded)
Income: $525k (1 earner)
Taxes: $135k
Tax Advantaged Savings: $90k (401k + Match, Megabackdoor, Backdoor Roth 2x, HSA)
Expenses (all-in): $200k (VHCOL area and should go down next year by $20k with no preschool)
After Tax Savings: $100k
We expect the total renovation to cost $800k, including all costs and a short term rental. The project should take 6-8 months and we would start in early 2025. Our plan is to use the $100k of cash and save an additional $50k by end of 2024. We would then fund the rest with monthly cash flow (approx $10k/month = additional $50k) + an approx $600k HELOC at 8% (prime - 0.5 for life on 10 year draw / 10 year repayment; interest-only payment = $4k/month). After the renovation is complete, we would divert all cash flow to paying off the HELOC as quickly as possible, which I think we could do in 8-10 years, given our current finances.
I agree with previous comments in this thread that we shouldn’t take out a loan to finance it, but given the high tax impact on our taxable investments, I think we would actually come out slightly ahead in the long term (20 years) by not raiding our taxable investments. Plus, the HELOC gives us some flexibility and it seems like rates will slowly come down. In a worst case scenario event, we could always sell our investments to payoff the HELOC in full.
Is this a good plan?
In general, the remodels get dated within 10 years so I wouldn't borrow past that time. In fact I assume it's a consumer item and should be paid in cash. Expanding sq.ft. generally increases value assuming it's not a weird special needs type of addition. I've seen some weird stuff in my day!
Do current local regs allow for Accessory Dwelling Units? I.e a separate rental property? I'm in CA and it's been a big push around here trying to accomodate additional housing in an area that is notorious for expensive and difficult building. People love these flex spaces whether it's for an Air B&B set up, longer term rental, nanny space or your original intention, an in-law unit. It will need a separate entrance and some kind of kitchen set up such as a micro wave, hot plate and mini-fridge.
Statistics: Posted by Carefreeap — Sat Aug 03, 2024 10:44 am — Replies 21 — Views 2970