Did a quick search and couldn't find the answer, sorry if it's been discussed.

We are about to start a major home renovation - approximately $100-$120k. Debating what option is the best to pay for the repairs and upgrades and what is the wisest move financially (yes I know paying cash is the best)

We purchased the house roughly 4 years ago. Refinanced last year in the low 2% range on a 15 year mortgage. We plan on staying in this house for 5 more years and then keeping it and turning it into a rental.

We have approximately $60k set aside in savings for the renovation.

We have around 100k in equity in the house. Living in Texas we are limited to an 80% cash out refi or HELOC loan if I understand it correctly, so we could withdraw another 55k and get us the amount we would need. The house is currently appraised at $275k and we owe $175. Our renovation budget will keep us in line with other houses in our neighborhood from a price stand point.

I can also get a personal loan up to $85k for up to 10 years at 5.75%. That's another option. We wold probably pay it back in 5-6 years.

What is the best option? Any others I'm missing? Thanks for any / all advice.

I'm sure you'll get lots of ideas here, but we just did the same thing last year and I used a combination of cash, HELOC, and a loan from my 401K. The 401K loan was very intentional as I am using that piece as a proxy for the fixed income exposure in my portfolio. In other words, instead of investing $50,000 in bonds yielding 1% interest to get that part of my allocation in place, I'm using my loan to be my own Bank and am paying myself 4.5% interest on that same $50,000 right back into my 401K. Allows me to sneak some more money into my 401K with a disciplined payback plan over 5 years. Interest rates in the bond market likely will be sub-4.5% for the next 4 years while this loan is still on the books, so it made sense in my case.

Good luck with the renovations!

1) You can't have both a HELOC & Cash-out refi at the same time in Texas. I assume your last refi was simply rate/term and not cash-out? HELOC is going to be a floating rate, so decide what you think rates will do. Cash-out is going to cost you 3% or so in closing costs, and will preclude you from getting a HELOC in the future (I hate giving up flexibility). Both of these options have interest that is (consult with your cpa) potentially tax-deductible.

2) Do you have a taxable portfolio? Securities lines of credit are going to be somewhere between 1% and 4%. Quite a bit of flexibility there, generally my first option for something like this.

3) Talk to a local lender. Should be able to get a home improvement loan for something like this, but it might make it more difficult with the contractor since he has to deal with the bank as opposed to a cash client.

You are doing a $120k renovation on a $275000 house to turn it into a rental? Man, I sure hope that's going to result in excess of a 50% rental increase to justify that!

And absolutely no way in this rate environment would paying cash be the best option.

Just my opinions of course.

Good question. We bought one of the most dated and "lived in" houses in the neighborhood with plans of fixing it up. We wanted the schools and the neighborhood and accepted a home that hasn't been updated much since it was built in '84.

We hope to keep it at $80-$90k. $120k is high end and that includes numerous things that will work well for us for 5 years but won't add a lot of value to the house. One examples is an outdoor hot tub. Another are new windows (current windows are 37 years old and look terrible). The roof also needs repair and still trying to figure out that cost.

It will not net us a 50% increase in rental rate. 25-30% is more in line with what a couple realtors have said. But we want to enjoy the house for the next 5 plus years. And then if the rental #s don't add up we will see and perhaps sell and not rent.

We have not done a HELCO loan. Might be the best choice along with some cash. I do not have a taxable portfolio not have I even entertained a 401k loan. To be honest I don't know enough pro / con wise If a 401k loan is a good choice.

Are Home Improvement Loans the same as unsecured personal loans? I've talked to a local credit union today and got another quote at 5.5% for an unsecured personal loan for 96 months for up to $65k. Goal would be to pay it off in 4-5 years.

Thanks all for the input and questions. This is not my wheel house so I appreciate the help and criticism/ critiques.

This is off topic but keeping that hot tub in decent shape while renting is dang near impossible. Dropping that from your renovation list should help out a ton financially. Now and later.

Slightly tangent to your original question but turning this into a rental in 5 years sounds extremely tax inefficient. When you sell your primary residence you usually don't owe any tax on the sale. Once you convert it to a rental, after a certain number of years, when you sell it your cost basis will be the price you paid for it 4 years ago and you will owe tax on the amount over that you sell it for.

You would probably be better off selling in 4 years and take the tax free appreciation and buy a different house to rent out which will effectively reset your cost basis.

Ok... So break this thing down, and separate "investment" items from luxuries. The investment items should bring about a great increase in value and/or rent to make them worthwhile, the luxuries are sunk costs for your enjoyment.

I'd likely not want a hot tub if I were a landlord, BTW.

Then, figure out what needs to be done at once and what can be done over time. Good windows can be installed at about $500 each, and most installation companies will give you a 12 month payment plan. So cash flow that coupled with cash on hand.

Roofs are not what I would call renovation, so if that is in need of replacement, get after it and pay with cash on hand, or 12 month payment plan like above.

Once that is done, I'm assuming you are doing stuff like a brand new kitchen and bathroom types of projects. If it were me, I'd put it off and live with it as is for a few years. Then, when it is time to become a rental property, I'd only do what would fall into the investment category.

To be honest, you've said this isn't your wheelhouse (mine either, I'm not a real estate investor, but I am a home owner). It sounds to me like you are walking toward really over extending yourself financially, and potentially ending up in an upside down situation. I put a pool in about 14 years ago and I've always told people it was a horrible investment, but a wonderful purchase.

Maybe if you draw this out over a few years you can cash flow much of it, minimize your debt increase, and, most importantly, figure out which things you should and shouldn't do given the goal to turn it into a rental. Don't get sucked in to the excitement of planning this grand renovation..

IF it was up to me, I would not get a hot tub. You can do the math on who wants it. I think it's a horrible ROI, especially for 5 years, and will be even worse trying to manage it if we turn it into a rental.

I should have broken down a needs vs wants. The roof / windows and, to an extent, the carpet, all need to be replaced / repaired. But that is part of home ownership.

We could certainly live in this house for a few years and cash flow it. But, and this is me and my wife being impatient, we want it done now so we can finally enjoy the house.

I mentioned we have 60k in savings. We can add $3-4k a month to that and in 6 months have $85k give or take. And it will take 6 months from today to finalize, order and install everything - so in theory we could cash flow it.

But you had mentioned "And absolutely no way in this rate environment would paying cash be the best option." So should I go, in your opinion, HELCO or home improvement loan? 1/2 cash? Curious your thoughts.

I absolutely agree. We don't want to get upside down. I think, as I mentioned, the hot tub is a terrible idea. The rest of our list seems somewhat solid. We walked thru the house with a real estate agent and other than a few items - paving the courtyard, hot tub, outdoor playground for the kid, most ideas she was in favor of in terms of adding value to the house and us being able to recoup a fair % back IF we sell.

But I would be curious on your thoughts on partial cash with a HELCO or private home improvement loan. Thanks

I wouldn't sit on idle cash and take out a loan. If you can secure a HELOC, then you can use much of your cash on hand and keep the HELOC for emergency purposes. I know that seems contradictory to my statement to not pay cash, but I wouldn't keep that amount of cash in my savings account and then borrow. At 5.5% interest, probably best to use the cash on hand.

Also, HELOC comes with a variable rate I believe, so be prepared for that.

This isn't a simple question to answer. Lots of personal situation variables to consider. I wouldn't have done a 15 year mortgage to begin with, as you are seeing there is little to no value in being locked in to that shorter term. Liquidity is what it takes to do things (invest, spend, buy).

Patience is a virtue they say.

If you have $100k in equity and $60k in cash, I wouldn't put that into a house currently valued at $275,000. I don't know your exact situation, so I don't know if moving is an option.

But to answer your original question, I agree with the poster above - I would use the cash first then HELOC.

Texans typically get insurance companies to pay for their roofs after hail/wind storms - maybe that could work for you.

I know I'm beating a dead horse but I just wouldn't get a hot tub. Unfair comparison but I almost equate getting one of those in 2022 as the same as getting a water bed.

Our current house apparently used to have an in-ground hot tub in a closed off, private patio connected to our master bedroom and prior owners who put it in ultimately filled it back in. We now have a square garden bed with a Japanese Maple where a hot tub once occupied that space. I've always thought that was amusing for some reason because it looks sort of random.

Moving is an option. At least for me. But my wife has very strong sentimental attachment to the house and we both love the views / neighbors. So there's that.

We are looking at houses that fit our needs but all so far have cost significantly more than fixing up the house we have or would need some work done on the new house.

I live in El Paso - not much hail sadly out here. Just the west Texas sun has taken its toll. Had insurance come out and there is nothing for them to cover. It's a flat roof, which helps. Don't need a new roof, just some expensive ($7k) in repairs.

why not save a little more and then... buy an investment property with 20% down and then start building equity in 2 properties... do a HELOC for minor renovations where you think you'll get ROI (not a hot tub) and then once you move out.... you'll have 2 rental properties.

Wish I had the cahones to buy a SFH right now. I just invest in REITs or raw land deals instead.