Residential remodeling without experience a risky venture

Dear Bruce: I’d like to refurbish a two-family house I own. It has a two-bedroom apartment on the first floor and a three-bedroom apartment on the second floor. The place is well below market standards in this area; both kitchens and bathrooms need updating, and the front porch and stairs need to be rebuilt (although the basic framing seems fine). I’m 59 years old and just recently returning to work after losing my job as the result of downsizing. I live in the house now and plan to continue living here for at least another one or two years.

I’d like to hire someone to guide me through this refurbishing phase, but I’m not sure who to go to for advice. General contractors have the experience I need, but I think they’re more interested in selling services than dispensing useful information. Would a Realtor be more appropriate? If so, how much should I expect to pay for their opinions? Can they help me get financing? I’m thinking the work itself is going to run about $100,000, and I have another $50,000 in existing debt. Rent income should run about $2,500-a-month gross before $3,500 taxes and $2,500 insurance yearly. – B.M., Boston, Mass.

Dear B.M.: Since you have no experience in this area, you are walking into a perilous situation. If you need help in deciding what has to be done, an architect, not a contractor, is the person with whom to speak.

You would be wise to hire a contractor to perform the work. You may have to get bids from several, and, frankly, jobs of this size are not going to interest many contractors; there’s just not enough volume to justify it. Don’t even think about trying to do it yourself. Have an architect help you maximize the value of the building with the least amount of investment, then deal with the contractor. The numbers you mentioned seem to add up, by the way. The income versus the investment seems to make sense.

Don’t pay cash for renovations

Dear Bruce: We are about to start a major kitchen renovation and addition to our house. The estimated cost is $160,000, and we have $180,000 cash in the bank. We owe about $40,000 on the first mortgage, with an adjustable-rate mortgage currently at 3.75 percent (to be adjusted next month). We also have an equity loan of about $9,000, with a rate that has skyrocketed to 7.25 percent.

Should we refinance our two loans into one and add the cost of the remodel so we can get some tax benefits from the remodel, or just pay for the remodel in cash? — K.S., via e-mail

Dear K.S: Why in the world would anybody keep that kind of dough in the bank? As a bank director, I would love to have you as a customer, but that kind of money should be invested elsewhere.

Paying cash, in my opinion, would be the height of foolishness. However, since you now have an adjustable-rate mortgage that is adjusting, you will likely get hit with a big increase, based on interest rate increases by the Federal Reserve. Now is the time to lock in a fixed mortgage that includes the home-equity loan, your 401(k) and whatever it is you are going to put in the house. I’m making an assumption your income will support this kind of mortgage.

I would not even consider paying cash for the addition – you’ll lose the tax advantage, and the money can easily earn more than mortgage money is going to cost you.

Paying rent isn’t necessarily a bad idea

Dear Bruce: I am 27, and my wife is 24. We currently live in a home owned by my mother, and we are paying her $350 a month, which is very inexpensive by any standard. The home meets our needs now and even when we have children in the future. I am concerned, however, with paying rent that could be applied to a mortgage on our own place. We feel we can handle a mortgage in the $800-a-month range.

Would we be better off in the long run to pay the low rent and invest the money or buy a house and have little to invest? I can’t make a competent decision. – S.E. in Florida

Dear S.E.: It wouldn’t be hard for me to make a decision on this matter.

You are talking in terms of $5,000-a-year increase in the cost of shelter. On top of the mortgage payment, you will likely have insurance and taxes, which must be folded into the $800. At the end of a 10-year period, you could invest the difference of $50,000-plus, which should have easily grown to more than $100,000. There is no way on an $800-a-month mortgage payment that your equity would grow to anything like that. This is even taking into account a reasonable expectation of an increase in value.

You’re comfortable where you are, and you are getting a huge bargain. This is one of those cases where if it’s not broken, please don’t fix it!

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.