How to lose money when renovating your home

When you renovate your home, you want to know if the cash you spend will increase the value of your home – how much you can sell it for or add to your wealth.

Unfortunately, home renovations fail for a variety of reasons: taking on too much debt, getting into legal trouble if the project violates building or zoning codes, or simply making choices you regret. Whether you’re doing it for your own enjoyment or with an eye toward an imminent resale, here’s what you need to know to avoid taking a huge hit on your next home improvement project.

5 ways to lose money on renovations

1. Choosing the wrong funding method

Paying for home improvements out of pocket remains by far the most popular way: 83% of homeowners who made improvements last year used cash from their savings, according to more than 30,000 respondents to the 2024 U.S. Houzz and Home Study. Indeed, taking money from a savings or investment account is the easiest and certainly the cheapest way.

But coming up with the financing isn’t always practical, especially these days when big projects can cost five or even six figures. Even if they can afford to pay in full, some homeowners prefer to maintain liquidity by setting aside savings for emergencies or long-term financial goals.

This means you need to choose the right financing method to pay for your home renovation costs. The method you use to borrow can have a big impact on the overall cost of your project. Consider one of the following:

• Home renovation loan
  • A type of unsecured personal loan that usually has a higher limit than a regular loan and a lower interest rate than a credit card (depending on your credit score).
  • Best for: Low-cost renovations that can be paid off in a short period of time.
• Mortgage
  • A home equity loan is a fixed-rate loan that can last anywhere from 5 to 30 years. Also known as a second mortgage, a home equity loan turns your home equity into a lump sum of cash that you can start paying off right away. They also typically have a lower interest rate than a HELOC (line of credit).
  • Best used for: Obtaining funding for a single project of $10,000 or more (a project where the total cost is fairly set).
• Mortgage-backed lines of credit (HELOC)
  • A HELOC works like a credit card, but it’s a line of credit that allows you to borrow against your home’s equity as needed at a variable interest rate. You can usually draw funds over up to 10 years (often making interest-only payments), and then you have 20 years to pay off the debt.
  • Best for: People who need a pay-as-you-go option for big-ticket or lengthy home improvements.
• Cash-out refinancing
  • Exchange your current mortgage for a larger mortgage and receive the difference in cash. The additional amount is based on the equity of your home. You’ll have to pay closing costs, but you’ll get a lower interest rate than other financing options.
  • Best when: For larger renovations that will take longer to pay off, and if interest rates have fallen since your first mortgage.
• Interest-free credit cards
  • Another idea for a low-cost project, or part of a project, is to pay off a new card with 0% introductory interest. It’s a strategy John Pterbaugh, senior director of editorial at Bankrate, based in Charlotte, North Carolina, has employed for several years. He’s used card offers on a variety of renovations at various price points, from a $20,000 kitchen remodel to a $10,000 new HVAC system to a $4,000 replacement floor. The key, he stresses, is to treat the debt as a short-term loan. “If you can pay off the balance before the interest-free period ends, it’s a good option,” he says. Carrying a balance over can get you charged hefty fees. Credit card interest rates averaged 20.73% as of July 31.
  • Best for: Renovations that you can pay off within a few years (before the card’s interest-free period ends).

2. Follow trends

You don’t want to spend a lot of time and money renovating if your home is going to look dated in five years’ time.

“Looks can often tell you when a home was remodeled,” says Frances Katzen, a real estate broker with Douglas Elliman in New York City. “Cherry red flooring, for example, is very outdated in today’s market. Looking at the width of the floorboards and the color of the wood can tell you when a home was remodeled or built.”

That being said, it’s no good being completely ignorant of trends and what homeowners in your neighborhood are doing. To stay competitive at resale, your home should have features that are standard in the neighborhood or area, like a pool, a gorgeous patio, or an enclosed porch.

3. Hiring the wrong contractor

Finding the right contractor for your home improvement project can be a daunting task in itself. Choosing the wrong contractor can mean major delays, poor work, or even legal trouble. “Not all contractors, even the best ones, are great at every job,” says Marco Zappacosta, CEO of home improvement platform and search service Thumbtack.

Not comparing prices is another surefire way to lose money, so don’t go with the first contractor you come across, even if a relative, colleague, or neighbor highly recommends them. Look at at least three companies and get quotes from each. “People are surprised by the difference in quotes,” says Zappacosta. “They know it’s going to cost them something, they just don’t want to pay the high price.” Wrong “Price” is almost always negotiable, but “you can only negotiate if you get multiple quotes,” he points out.

To make the right decision, you need to:

• Vetting contractors: Look for people with good online reviews or through referrals. Ask for references and check their qualifications. And above all, when interviewing, “ask for recent examples of work similar to yours, preferably in your area,” advises Zappacosta.
• Get it in writing: Have a written contract ready that clearly states the work to be done, materials and supplies to be used, the work schedule, how payment will be made, etc. Be sure to ask about any markups for materials.
• Pull Permissions: Cities and counties often require a work permit for many types of projects. This approval is required before work can begin, and often the work must be inspected by the city or county after it’s completed. A contractor should handle all of this for you (another reason contractors should do a lot of work in your area), but it’s ultimately your responsibility as the homeowner.

4. Try to do it yourself

Tackling home improvements yourself is a great way to save money and add a personal touch to your home. But you need to know when things are out of your control. Serious DIY work involves more than just redecorating.

“I think things can really go wrong when owners are trying to create more than a studio,” says Katzen, noting some of the mistakes she’s seen include misaligned moldings, uneven tile in the bathroom and the installation of the wrong size dishwasher.

“Sometimes it’s the little things that stand out and show that it wasn’t exactly how you wanted it to be,” Katzen says. Amateurish renovations can turn off home buyers and lower your purchase offer.

A job done poorly can also cost you in the short term because you end up paying for the same project twice: once for the DIY work and once for calling in a pro to fix the problems with the DIY work. Paying the premium to do it right the first time is often cheaper and less time consuming.

5. Too big

Many of the projects with the lowest return are those requiring large budgets. Renovation “2024 Cost vs. Value Report” (see below for details).

“I get asked a lot of times, ‘How much should I invest in this so I can make more money when I sell?'” says Aaron Buchbinder, president and founding agent of real estate platform Compass in Boca Raton, Fla. “And I look at most sellers and I usually say, ‘Do what it takes.'”

When you’re renovating, it’s easy to get carried away with upgrading and reconfiguring your space. But keep it simple. “Some homeowners are so eager to get to the stage where they can flip their home, but that’s not your job,” Buchbinder says. “Leave that to the next person.”

Katzen agrees, adding that many homeowners dwell on lavish renovations that future buyers may not want. “A clean, well-structured, well-balanced kitchen is always better than, say, a sauna with heated floors,” Katzen says.

The best and worst renovations in terms of return on investment

Most remodels don’t provide a 100% return on investment (ROI). But some are better than others. It may seem counterintuitive, but more modest, affordable remodels generally have a better chance of recouping their costs at resale. Extravagant remodels tend to provide diminishing returns. Based on trade publications, here are five of the best and worst remodels in terms of increasing home value. ModsAnnual evaluation of the project.

3 ways to renovate without wasting money

1. Focus on small improvements

As Renovation According to cost vs. value reports, a little investment can go a long way, especially if you’re renovating to sell your home. Large scale renovations often have the worst ROI.

“I always say give it a fresh coat of paint,” says Buchbinder. “A clean, neutral look makes it easier for buyers to envision what they could do with the space.”

Katzen agrees: “Renovating with a goal of a clean, timeless look will increase your renovation’s staying power. That doesn’t mean you should completely compromise your personal tastes, but if you’re planning on selling soon, keep in mind that overly ambitious renovations could backfire and scare away potential buyers whose tastes may not match yours.”

But if you’re just renovating for yourself and don’t plan on selling, a focus on simplicity and affordable materials can help you achieve a satisfying result. “You don’t need a ton of money to do a really nice renovation,” Katzen says. “I think it’s a myth that people get carried away with fancy decor.”

2. Modernize your home

You can hardly go wrong by making your home radically and functionally modern. Your HVAC, plumbing and electrical systems need to be up to date and up to code. If you want to truly compete with your real estate competitors, you need to be state of the art.

Consider your home’s design and layout, too. Does it work with your modern lifestyle? One way to update, especially in an older home, is to open up the floor plan. “Incorporating small rooms that aren’t used anymore in your home, like closets, into the bedroom can make the room feel larger and more open,” says Katzen.

Another step is to replace your appliances and fixtures with newer, more energy-efficient ones. Some will cost more to install, but this is a good investment, as eco-friendly features are increasingly a selling point when listing a home. If you live in the place, it will also reduce maintenance costs, which have increased in recent years.

3. Budget and borrow the right amount

It’s important to budget the right amount for your renovation. Borrow too much and you’ll end up paying unnecessary interest. Borrow too little and you risk running out of funds and the stress of delays.

People withdrawing savings should also consider cost opportunity and the time value of money. You don’t want to cash out too much, or too quickly, unnecessarily reducing the earning power and value of your funds.

Regardless of how you pay for your project, be prepared for unexpected expenses: “Something always goes wrong in the construction business,” says Amy Sims, editorial director at Bankrate.

Sims speaks from experience: When he was renovating the basement of his Charlotte, North Carolina, home, he ran into a problem installing a bathroom. The basement walls weren’t square, so a pre-formed acrylic-walled walk-in shower wouldn’t fit. He had to decide whether to remove the wall, make it square, and redo all the plumbing, or install a more expensive tile shower.

They chose tile. “We ended up spending an unexpected $3,500 more to make the shower work,” Sims says. Luckily, she had left some room in her budget for the overage. If she hadn’t planned for unexpected costs, the extra amount could have put her in a tight spot and jeopardized the renovation.

Her advice is to decide the maximum amount you’re willing to spend and budget your project below that amount — in other words, build in a cost buffer. That way, if something unexpected comes up, you know you’ll have it covered.

Final advice on how to save money on home renovations

Whether you plan to sell quickly or stay in your home long term, you need to ask yourself whether your renovations will get you the results you need.

“Are you doing it for yourself or are you doing it to flip the property?” asks Buchbinder. Expecting big profits from renovating is risky business. Ultimately, you should renovate for your own enjoyment, not for profit, he adds.

Careful budgeting and planning ahead for everything from financing options to choosing contractors can help set up a successful renovation, both financially and for your future life. But remember: The surest way to lose money on a home renovation is to be too focused on making money. After all, it’s your home, not your retirement account.

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