Renovating will probably cost you less than buying a new house, but expenses can quickly get out of hand


Without proper financial planning, those who go the reno route can find their finances depleted

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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

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Most of us are spending far more time in our homes due to pandemic-related restrictions, leaving many to wonder whether they should tackle a house renovation or change the scenery altogether by selling.

Six in 10 homeowners last year were planning to renovate in the next two years, while 57 per cent believed it was a good time to buy because of low interest rates, according to the 2021 Scotiabank Housing Poll. A third of those in housing hot spots (British Columbia, Ontario and Quebec) said they were looking to move or buy a home outside the city to get more bang for their buck.

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But experts say homeowners should tread carefully before selling because renovating may still be more cost-effective.

Chander Chaddah, a broker at Sutton Group Associates Realty Inc. who has been in the real estate business for 34 years, said he always starts conversations with potential clients by finding out why they want to sell in the first place.

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“If you’re living in a semi and want a detached house, or are downsizing, that’s one thing,” he said. “But if you love where you live and like your neighbours, but need more livable space, it might make sense to do a reno and stay where you are.”

If you love where you live and like your neighbours, but need more livable space, it might make sense to do a reno and stay where you are

Sure, renos can be expensive, but Chaddah advises people to consider the amount they’ll spend on the land transfer taxes, realty fees and repairs necessary if they buy.

“When you add a second floor or finish a basement, you’re adding equity to your home and you’ll see the compound rate of return on that investment over time,” he said. “Moving expenses will never accrue value.”

Closing costs a killer

Benjy Katchen, chief executive of Wahi Inc., a recently launched digital real estate company targeting the Greater Toronto Area, said most people buying a house don’t understand the extent of their closing costs until 24 to 48 hours before the deal closes.

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“They’re often left scrambling to come up with the extra money,” he said.

This lack of transparency in the buying and selling process was the impetus behind launching Wahi.

“We’re bringing all the disjointed pieces together on one digital platform,” Katchen said. “And we’re aiming to educate consumers so they know everything there is to know and can plan accordingly.”

Most people buying a house don’t understand the extent of their closing costs until 24 to 48 hours before the deal closes.
Most people buying a house don’t understand the extent of their closing costs until 24 to 48 hours before the deal closes. Photo by Gavin Young/Postmedia

For example, Katchen said the land transfer taxes on a Toronto home worth $1.3 million are $47,000, and real estate fees can take up to five per cent of the price. (Properties in Toronto are also subject to double the land transfer tax compared to the rest of Ontario.)

“That could be $120,000 that’s going to be paid out of pocket on a typical sale,” he said.

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And that’s not considering property appraisal fees ($300 to $500), a home inspection ($300 to $500), legal costs ($1,500-plus), moving expenses ($400-plus) and furnishings for the new home either.

“My view is that you could put up to that into a renovation and at least be at equal,” Katchen said.

But experts say it’s also important to factor in potentially higher property taxes and maintenance fees when upgrading to a bigger home.

Why renos aren’t always rosy

Without proper financial planning, those who go the reno route can find their finances quickly depleted, said Alim Dhanji, a senior financial planner at CI Assante Wealth Management in Vancouver.

He advises sitting down with a trusted financial planner to determine a clear renovation budget, along with a savings strategy to get there if needed.

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Dhanji suggests renovation funds be put into a short-term guaranteed investment certificate or high-interest savings account without easy-access penalties.

“If you have to use a line of credit or refinance to renovate, you want to make sure you’re able to service that debt long term,” he said. “And you always need a little wiggle room in case things don’t go according to plan.”

A home renovation went sour for Dhanji when one of his contractors walked out on the job to take a higher-paying one.

“It’s important to have a contract in place with your contractor and hold at least 20 per cent back as a retainer so you have some sort of recourse if they don’t finish the job,” he said.

In his case, the retainer was used to secure a new contractor who successfully finished his reno.

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Given that no one really knows where housing markets will go, renovating or buying just to resell is too risky an endeavour these days, Dhanji adds.

“You have to think, can I live here long-term and manage the cash flow long term if needed?” he said.

Above all else, be prepared to be involved throughout the renovation. Even with a project manager, those going the renovation route need to prepare themselves for a stressful and at times all-encompassing process.

“I always tell my clients who are looking to renovate that this will be the most lucrative or expensive part-time job they will ever take on,” Chaddah said. “If you’re not engaged in the process, mistakes and duplications will happen and that’s where expenses go out of control.”

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