How to lose money renovating a home

If you’re renovating your home, you want to know the cash you spend is going to boost your home’s value — the amount you can sell it for, or the worth that enhances your own estate.

Unfortunately, there are many ways for home renos to go wrong: too much debt, legal trouble if the project violates building codes or zoning rules, or even just regretful choices. Here’s what you need to know to keep from losing your shirt on your next home improvement project, whether it’s for your own enjoyment or with an eye towards an imminent resale.

5 ways you can lose money when renovating

1. Choosing the wrong financing

Paying for home improvements out-of-pocket remains the most popular method by far: 83 percent of homeowners who renovated last year used cash from savings, according to the 30,000-plus respondents surveyed by the 2024 U.S. Houzz and Home Study. Certainly, pulling money from a savings or investment account is the simplest, and arguably cheapest, way to go.

However, coming up with the funds isn’t always feasible, especially with extensive projects easily costing five, if not six, figures nowadays. Even if they can afford to pay outright, some homeowners prefer to stay liquid, safeguarding their savings for emergencies or long-term financial goals.

That means you need to choose the right financing method to pay for your home reno: the way you borrow can have a big impact on the project’s overall cost. Consider one of the following:

• Home improvement loan
  • A type of unsecured, personal loan typically with a higher limit than the typical loan and a lower interest rate than a credit card (depending on your creditworthiness).
  • Best for: lower-cost renovations that you will pay back quickly.
• Home equity loan
  • Home equity loans are fixed-rate loans with five to 30-year terms. Aka a second mortgage, a home equity loan turns your home equity into a lump sum of cash you begin repaying immediately. It also usually comes with lower interest rates than a HELOC, its line-of-credit cousin.
  • Best for: acquiring the funds for a single project of $10,000 or more — one whose overall cost is pretty well set.
• Home equity line of credit (HELOC)
  • A HELOC works like a credit card, but it’s a credit line borrowing against your home equity as you need it, at a variable interest rate. Typically, you’ll be able to draw funds for up to 10 years (often paying only interest), then have to repay the debt in 20 years.
  • Best for: those who need a pay-as-you-go option for more expensive or protracted home renovations.
• Cash-out refinance
  • You exchange your current mortgage for a bigger one, receiving the difference in ready money. The extra amount is based on your home equity’s value. You’ll have to pay closing costs, but you’ll get a lower interest rate than with other financing options.
  • Best for: large renovations that will take a while to pay off , and if interest rates have dropped since your first mortgage. 
• Zero interest credit card
  • Another idea for lower-cost projects, or a portion of a project, is to charge it — on a new card with a 0% introductory rate. That’s the strategy Bankrate’s Charlotte, NC-based Senior Director of Editorial John Puterbaugh has followed over several years, taking advantage of card offers for various renovations at various price points, from a $20K kitchen remodel to a $10K new HVAC system to a $4K reflooring. The key, he emphasizes, is to treat the debt as a short-term loan: It’s “a good option, provided you can clear the balance before the no-interest term ends,” he says. If you carry the balance beyond, you could get socked with some high charges — credit card rates average 20.73 percent as of July 31.
  • Best for: renovations whose cost you can repay within a couple of years (before the card’s zero-interest  period expires).

2. Chasing a trend

You don’t want to sink a lot of time and money into renovating your home if it’s going to look outdated in five years.

“You can often tell the time of renovation by the look,” says Frances Katzen, a real estate broker for Douglas Elliman in New York City. “For example, cherry red flooring is very dated in today’s market. You can tell the time of the renovation or when the house was made by the width of the floorboards and the color of the wood.”

That said, you don’t want to be completely oblivious to trends — or to what nearby homeowners are doing. To be competitive at resale time, a home should have features that are the norm in its neighborhood or area, be that a swimming pool, elaborate patio or enclosed porch.

3. Hiring the wrong contractor

Finding the right contractor to renovate your home can be a job in-and-of itself. Choosing the wrong one could land you with a badly delayed or poorly done project, or even in legal trouble. “Not every contractor is a great pro for every job, even if they’re a great pro,” says Marco Zappacosta, CEO of Thumbtack, the home improvement platform/search service.

Not shopping around is another sure-fire way to lose money. So, don’t just go with the first contractor you meet, even if they came highly recommended by a relative/work colleague/neighbor. Look at least three, and get bids from each. “People get shocked at the spread of quotes,” Zappacosta says. “You know you’ll have to pay a price. You just don’t want to pay the wrong price.” Just about any bid is open to discussion, he notes, but “negotiations are possible only if you get multiple quotes.”

To make the right decision, you’ll want to:

• Vet the contractor: Find someone with good online reviews and/or through a referral. Ask for references and check their licensing credentials. Most of all, when interviewing, ask for “examples of jobs like yours they’ve done recently — ideally, in your area,” Zappacosta advises.
• Get it in writing: Have a contract that outlines the work they’ll do and the materials/supplies they’ll use, the work timeline and how you’ll pay for it. Make sure to ask about mark-ups on materials.
• Pull permits: Cities or counties often require a work permit for many types of projects. You’ll need this approval before work begins, and oftentimes, the work will need to be inspected by the city or county after the job is completed. Your contractor should handle all this for you — another reason they should have worked a lot in your area — but it’s ultimately your responsibility, as the homeowner.

4. Trying to do it yourself

Tackling some home improvements yourself can be a great way to save money and put your personal stamp on a place. However, you need to know when you’re in over your head. Serious DIY jobs involve a lot more than redecorating.

“Where I think it gets really a little bit undone is when you’ve got an owner who’s trying to do more than a one-bedroom apartment,” says Katzen. Examples of things that go awry that she’s seen include molding with joints that don’t line up, uneven tile in the bathroom and installations of the wrong-size dishwasher.

“It’s just little things that you can sometimes see that give away the fact that it didn’t come together in the same way as they had hoped,” Katzen says. And amateurish-looking remodels can really turn off homebuyers, reducing the size of the offers they’ll make.

Bungled work can also cost you more in the short run because you’re paying twice for the same project: once for your DIY job, and once to fix the problems with your DIY job — by calling in a pro. Paying more to do it right the first time is often cheaper and less time-consuming.

5. Going too big

Many projects with the lowest rate of return are those big-budget items, according to Remodeling’s “2024 Cost Vs. Value Report” (covered in more detail below).

“There are so many times I get asked ‘How much money should I put into this so I can make more money when I go to sell?’” says Aaron Buchbinder, principal and founding agent of real estate platform Compass in Boca Raton, Fla.. “And I look at most sellers, and I usually say, ‘Do the necessities.’”

It’s easy to get carried away on upgrades or reimagining your space when you’re renovating. But you should keep it simple. “Some homeowners get really into it, trying to get into the home-flipping stage — that’s not your job,” says Buchbinder. “Let the next person figure that out.”

Katzen backs this up, adding that many homeowners get fixated on lavish updates that future buyers may not want. “A clean, well-proportioned and -constructed kitchen wins every time over, say, a sauna with heated floors,” says Katzen.

The best and worst renovations for return on investment

Most renovations won’t provide you a 100 percent return on investment (ROI). But some perform better than others. It may seem counterintuitive, but in general, more modest, affordable renovations are more likely to recoup their costs at resale time: Deluxe touches tend to offer diminishing returns. Here are the five best and worst renovations in terms of home appreciation, based on trade journal Remodeling’s annual evaluation of projects.

3 ways to renovate without losing money

1. Focus on small improvements

As Remodeling’s Cost vs. Value Report shows, a little goes a long way, especially when renovating your home to sell. Often the biggest renovations have the worst ROI.

“I always tell people to do a fresh coat of paint,” says Buchbinder. “Having a clean, neutral look helps buyers imagine what they can do with the space.”

Katzen agrees: Renovating with an eye for clean, timeless looks will give your renovation more staying power. Not that you should completely compromise your personal taste — just bear in mind that going bold can backfire if you plan on selling soon. You risk alienating would-be buyers whose tastes may not align with yours.

But even if you’re not selling, just remodeling for your own use, you can put an emphasis on simplicity and more affordable materials and come away with something you’re proud of. “You don’t have to have a lot of money to do a really nice renovation,” says Katzen. “And I think that’s the illusion — that people get carried away with fancy frills.”

2. Modernize the home

You rarely go wrong making a home modern in fundamental, functional ways. HVAC, plumbing and electrical systems should be up-to-date and up to code — even state-of-the-art, if you really want to be competitive with real estate comps.

Consider your home’s design and layout, too: Does it track with contemporary lifestyles? One way to update, especially with an older home, is to try to open the floor plan. “Small rooms that no longer have use in the house, like a closet that maybe could be incorporated back into the bedroom, can make the room larger and much more open,” says Katzen.

Another step is to replace appliances and fixtures with newer, energy-efficient choices. Though some can be costly to install, it can be a good investment, since eco-friendly features are increasingly becoming a selling point when a home’s on the market. While you occupy the place, it can also reduce your maintenance costs, which have been on the upswing of late.

3. Budget and borrow the right amount

Budgeting the right amount for a renovation is crucial. Borrow too much, and you’re paying unnecessary interest. Borrow too little, and there’s the risk of running short on funds and the ensuing stress of delays.

Those tapping savings need to consider cost opportunity and the time value of money, too. You don’t want to cash out too much or too soon, needlessly curtailing your funds’ earning power and appreciation.

However you pay for the project, expect the unexpected in expenses.“Something always goes sideways with construction,” says Amy Sims, editorial director for Bankrate.

Sims speaks from experience: When renovating the basement in her family’s Charlotte, NC home, she ran into a snag when installing a bathroom. Because the wall in her basement wasn’t squared, a walk-in shower with preformed acrylic walls wouldn’t fit. They had to decide whether to rip out the wall, resquare it and redo all the plumbing, or pay to put in a more expensive tile shower.

They went with the tile. “That ended up costing us an extra $3,500 unexpectedly to make the shower work,” Sims says. Luckily, she’d left room in her budget for overruns. Had she not planned ahead for unexpected costs, that additional amount could have put her in a tough situation and compromised the renovation.

Her advice: Come up with the maximum amount you’re willing to spend. Then, draw up a project budget that’s below that amount. In other words: Set your cost — plus a cushion. This way, when something unexpected does happen, you’ll know you can cover it.

Final word on not losing money renovating a home

Regardless of whether you’re planning to sell soon or stay in the house long-term, you need to ask yourself if the renovation will accomplish what you need it to.

“Are you doing it for yourself? Or are you doing it to flip the property?” asks Buchbinder. Counting on a remodel to offer a big return is a risky business. At the end of the day, you should renovate for your personal enjoyment, he adds — not for profit.

Careful budgeting and advance planning, on everything from your financing method to your choice of contractor, can make the reno a win, both for your finances and your future life. But remember: The surest way to lose money renovating a home is to worry too much about making money. After all, this is your residence — not your retirement account.

FAQ

• What should be considered when deciding whether to demolish the whole house and start from scratch?

  You should consider whether the home has any major problems, and whether it meets your needs for space, its age and its structural integrity. Ultimately, whether you knock it down or keep it standing depends on your budget and the demands your family places on the home.

• What are some consequences of not getting building permits during a home renovation?

  There are many potential consequences for not pulling a permit depending on your locale and the type of work. These include, but aren’t limited to:

  • Fines
  • Work delays
  • Homeowners insurance denying claims
  • Safety hazards
  • Difficulty selling the home

• Should you remodel, buy a fixer-upper or buy a new house?

  Whether you choose to remodel, go with a fixer-upper or buy a new house depends on your budget and where you want to be. Location is a huge part of the appeal of a home, and if you love the location of your current home, you may want to redo it rather than leave it.But if you’re ready to move, buying a home that’s turnkey-ready is often the choice customers with a lower budget make, says Buchbinder. Extensive renovations take time and money, which can result in you spending more than if you just bought a brand-new home. That said, there are home renovation mortgages, both private and government-backed, that let you finance a home purchase and renovation at the same time.

  Learn more: Should you remodel or sell?