How To Develop a Realistic Home Renovation Budget was written for Playlouder by a contributing author. Please note that contributing opinions are that of the author. They are not always in strict alignment with my own opinions. –Joe.
Have you been binge-watching HGTV renovation shows, and you’re itching to dive into your own project? Renovating your home can be a rewarding endeavor, especially if it adds value to your property.
Whether you're giving your kitchen a modern makeover or transforming your bathroom into a spa-like retreat, developing a realistic home renovation budget is crucial to mitigating costs.
According to a 2023 U.S. Houzz & Home study, nearly 3 in 5 homeowners remodeled or decorated in 2022 (58% and 57%, respectively), and nearly half made repairs (48%). Americans spent a record $567 billion improving their homes!
If you're joining the home renovation frenzy, but don’t want to end up sobbing into your cereal about your real-life money pit, you need to create a budget. This guide offers practical steps for developing a realistic budget, while also helping you avoid common financial pitfalls.
Assess Your Goals and Priorities
Before you start feverishly hacking up your puce-colored bathroom tile, take a moment to assess your renovation goals and priorities. Why do you want to renovate? Is it for your enjoyment or for potential buyers?
What are the key areas of your home that you want to improve? What are the most cost-effective ways to add value to your home? How much construction are you willing to live with if you are staying in your home during the renovation?
Understanding your objectives will help you allocate your resources effectively and construct an informed budget.
Be Mindful of Return on Investment
While creating a home renovation budget that suits your needs and preferences is essential, it's also wise to consider the potential return on investment (ROI). Certain upgrades, such as kitchen remodels or bathroom renovations, tend to have higher ROI and can increase the value of your home.
If your primary purpose is to increase home value, prioritize projects that earn you more money when selling than you spent on them. For instance, the National Association of Realtors Research Group estimated that the highest percentage of cost recovered for interior projects in 2022 was from refinishing hardwood floors at 147%. An upgrade of new wood flooring came in at 118%, and insulation upgrades at 100%.
Research and Gather Information
Now that you have a clear vision of your renovation project, it's time to gather information. Explore various design options, materials, and fixtures to understand their costs.
Visit home improvement stores, browse online catalogs, and consult with professionals to gather accurate estimates. The more knowledge you acquire, the better equipped you'll be to create a comprehensive and realistic budget.
Establish a Realistic Budget Range
Based on your research, establish a realistic budget range for your renovation project. The median spend for home renovations in 2022 was $22,000, whereas the median for higher-budget updates (top 10% of spend) reached $140,000 or more!
As a rule of thumb, never spend more than 10-15% of your home’s value on any one room. The smartest way to decide how much to spend on a home renovation is to take a look at your current monthly budget and determine how much you can comfortably put aside per month.
According to U.S. Houzz & Home in 2023, kitchens and primary bathrooms command the highest median spend: $20,000.
Determine Financing Options
Once you have an estimated budget range, consider your financing options. Are you planning to pay for the renovation out of pocket, or will you explore financing options such as home equity loans or lines of credit?
Here is a breakdown of the most popular options. In 2021, most home renovations were funded by savings, although credit cards crept up into a distant second.
Understanding your financial capabilities and the available options will give you a clearer picture of how much you can allocate to your project.
Break Down Your Budget
To ensure your budget is realistic and comprehensive, break it down into categories based on the different aspects of your renovation. Common categories include materials, labor, permits, design fees, and contingency.
Allocate a portion of your budget to each category, considering the estimated costs you gathered during your research.
Of course, you won’t be able to get an exact cost until you talk with contractors, but poking around online should get you a ballpark figure.
Here is a sample budget-friendly indoor and outdoor renovation breakdown of 1700 square foot home in Dunedin, FL in 2019:
You can see the before and after pictures of the sample property here.
It’s important to consider that building materials costs have increased by 5% to 10% in 2023, and many parts of the country are experiencing long delivery times. Keep that in mind if you researched any pricing before 2023.
Anticipate Hidden Costs
When developing your budget, it's essential to anticipate hidden costs that may arise during the renovation process. Structural issues, unforeseen repairs, or delays (so many delays!) can all impact your expenses.
It's wise to set aside a contingency fund of around 10-20% of your total budget. Keep in mind that older homes will need more system upgrades, which will drive up your costs significantly.
By setting aside a contingency fund and being prepared for unexpected costs, you'll have peace of mind knowing that your budget can accommodate these unforeseen circumstances. Experts agree that most projects will take longer than expected and cost more.
Obtain Multiple Quotes
Obtain multiple quotes from reputable contractors and suppliers to get the best value. Don't hesitate to negotiate and compare prices to ensure you receive competitive rates.
However, be cautious of extremely low bids, which may indicate subpar quality or hidden costs. Balance affordability with quality to find the right professionals for your project.
Plan Your Relocation Ahead
If your home renovation project involves significant changes that may require you to relocate temporarily, planning your relocation ahead of time is crucial. Here are some essential considerations to keep in mind when moving:
- Temporary accommodation: Research and budget for temporary accommodation if your renovation will render your home uninhabitable. This may include renting an apartment, staying with family or friends, or booking a short-term rental. Consider the duration of your renovation and the associated costs of alternative accommodation.
- Moving and storage expenses: If you need to move your belongings out of your home during the renovation, budget for moving and storage expenses. Obtain quotes from reputable moving companies to assess the costs involved—additionally, factor in the cost of renting a storage unit if necessary. Experts at City Movers advise secure, temperature-controlled storage units.
- Transportation and commuting: Consider the impact of your temporary relocation on your transportation and commuting expenses. Will you need to travel a longer distance to work or other daily destinations? Budget for additional fuel costs or public transportation fares that may arise during the renovation period.
- Pet care and boarding: If you have pets, budget for their care and boarding during the renovation. Determine if they can stay with family or friends or if you must make arrangements for professional pet care services. Remember that these costs can add up, so you must include them in your budget.
Don't Forget about Post-Renovation Costs
When developing your budget, it's also essential to consider post-renovation costs. This may include furniture, decor, and ongoing maintenance expenses—factor in these additional costs to avoid any financial strain once the renovation is complete.
Track Your Expenses
As your renovation progresses, it's crucial to track your expenses diligently. Keep a detailed record of all costs incurred, including receipts and invoices. This will allow you to monitor your spending and make adjustments if necessary.
Staying organized will also help you identify areas where you may be overspending or areas where you can reallocate funds.
Regularly Review and Adjust
Throughout the renovation process, regularly review your budget and make adjustments as needed. Stay proactive in managing your finances and ensure your spending aligns with your original plan.
As you make decisions and encounter new information, be willing to revise your budget to reflect any changes accurately.
If unexpected expenses arise in one area, consider reallocating funds from another category that may not be as crucial to the overall outcome of your project. This way, you can maintain the financial balance and achieve your renovation goals.
By developing a realistic budget for your home renovation, you can embark on your project with confidence and financial clarity. Remember to assess your goals, gather information, establish a budget range, track your expenses, and be prepared for unexpected costs.
With careful planning and financial mindfulness, you'll be well on your way to transforming your house into the home of your dreams…without sobbing into your cereal.