Renovate or buy a home?
New perspectives on an old dilemma
You are desperate for more living space and now face the big decision - renovate your current home, or buy another one? Chartered Accountant Gerald Tracey, Investment Advisor, ScotiaMcLeod in Windsor, advises that this decision should be made in a two-step process.
"The current economic downturn makes it even more critical to look ahead and consider different scenarios. Both renovating and buying have pros and cons, and both are stressful, so make the bigger decision first - decide what you want and where you want to live. Then decide whether to renovate or buy. If you like your current neighbourhood, renovation may make sense, provided that the renovated value of your home is in line with the values of other homes in your area."
"Three key factors are also important to consider in making this decision," adds Chartered Accountant Albert Yu, Re/Max Hallmark Realty Ltd. in Toronto. "Financial costs, non-financial costs and resale value."
From the financial perspective, one simple rule is to determine what it will cost to move. This cost generally equates to about 10 per cent of the current value of your home and includes real estate commissions, land transfer tax, and moving and legal costs. Compare this cost to the cost of renovating, and if renovating is less then take the less expensive route.
"However, homes are much more than dollars and cents, so you should also think about the non-financial costs of relocating either yourself or your family - including the stress and upheaval involved in a potential move and the time it will take you to find services and professionals in your new community. If you do have children, consider how a new school, with new friendships will impact the kids."
Resale Value
"Your home is one of the largest investments you will ever make" continues Yu, "So its resale value is always a major consideration."
"It's a good time to move up in the real-estate market right now because higher-value properties have declined more in value. At the same time, it's a cooler market for sellers. If you decide to move up, think resale and follow the number one rule - location, location, location.
"If you are renovating, spend your money wisely - some renovations add more value than others to the final selling price. A kitchen or bathroom renovation will potentially return 100 per cent of your costs. A basement, family room or deck is another good investment, while landscaping upgrades only return about a quarter of your costs. Putting in a pool depends on your area so talk to your Realtor first - ideally it pays to be the worst home on the best street."
Current Economy and Financing Options
Tracey explains that while mortgage rates are very attractive right now, financial institutions are more demanding. Today more than ever, he cautions people about taking on any extra debt, especially in an uncertain job market, and he encourages them to manage their existing debt.
"If you are buying, check that you qualify for the size of mortgage you require. With the downturn in the real-estate market, financial institutions are looking harder at a home's appraised value (which is probably lower than it was a year ago) and will only lend a lower percentage of that value.
"If you are selling your home, look at its current appraised value and make sure you can get your equity out of it - if not, it may not pay to either move or renovate. Renewing your mortgage may also be tricky. Weigh the costs of other financing options such as a mortgage insured by CMHC (Canada Mortgage and Housing Corporation."
If you are renovating, Eco-Energy Retrofit grants - available for items including a furnace or insulation - will help reduce your costs. The new Home Renovation Tax Credit is also available on expenditures made before February 2010. This is a 15-per-cent federal tax credit on eligible expenditures between $1,000 and $10,000, which produces a maximum credit of $1,350 - http://www.cra-arc.gc.ca/gncy/bdgt/2009.
Source: Institute of Chartered Accountants of Ontario
