Updated: Feb 4, 2020
This is part 2 of a 3 part series on the cash impact of buying vs renting. In Part 1 we explored some of the factors that influence cash investment in home buying, such as monthly payment amount, length of time of ownership, repairs, closing costs, and interest rates.
The reason this question is important to me is because the opportunities to pour funds into improvements/repairs to your home are quite literally endless, which often gives homeownership a reputation of being so much more expensive than renting. I wanted to find out how to be strategic with that investment.
Here is what they said:
According to Cynthia, location is a key factor. You could purchase a home for 125k and invest 50k to make it outstanding, but if it is in a dilapidated neighborhood (let’s say average home price of 100k), it is unlikely that you will be able to get that money back upon resale.
Both realtors agree on the importance of making sure that the major components, or “bones” of the house are good before purchasing, such as foundation, sills, roof, heat pump, and no basement water issues.
Katie adds, “Buyers should not get caught up on cosmetic things, although I do find that most do these days. Cosmetic fixes are the best kind when looking to buy a home because those are generally easy and inexpensive to fix and can be done on a variety of budgets.”
I myself have found that aesthetic preferences become hugely impactful in the perceived value of a home. When someone sees a home that is outdated, dirty, and dingy, it directly impacts buyers’ perception of its condition, and therefore value, regardless of whether it is structurally sound and “has good bones.” Let’s say you purchase such a home for 150k, and invest 20k in refinishing floors, repainting the entire home, getting new lighting fixtures, new furnishings, and turn right around to sell it, a buyer’s impression of the home may have jumped up to more of a 190k value (a 40k jump), purely because of the gut response to seeing a fresh, clean, modern looking home.
Katie adds this caveat, “However, I will say if there are major issues with some or all of those it may also lead to a negotiating point and then it may make sense to still proceed with the house because you are getting it at a very reduced price.”
I have seen scenarios where individuals, like Katie said, purchased at such a reduced price that even investing a large of money did not hurt them in the long run. You could purchase a home for 150k, invest 10k, and resell for 170k (net gain 10k), or you could purchase for 60k, invest 50k, and sell for 130k (net gain 20k). Further, you can often get a mortgage that includes construction loan amounts for the work so you don’t have to have the cash on hand.
Lastly, Cynthia emphasizes the importance of renovating kitchens and bathrooms. In the past those were rooms that were as small and functional as possible, to give room for things like grand entryways, sitting rooms, and dining rooms. Now, however, we want to focus on the aspects of homes that match the social and psychological patterns of our time.
Thank you for collaborating with me, Cynthia and Katie!
In part 3, we will consider factors that may impact when renting may be a better option than buying.