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Should I Pay Down My Mortgage or Make Home Improvements

Written on May 11, 2009 by George Krueger & Mary-Lynn Foster in Money

Bigg success is life on your own terms. The five elements of bigg success are money, time, growth, work and play. Today our focus will be on money.

One of our listeners, Bob, called us with a bigg question. He and his wife have some extra money and they are wondering whether they should use it to pay down their mortgage or make some home improvements.

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Both options are very illiquid

You can’t get your money back once you spend it with either option. So make sure you have enough extra cash to cover between six to twelve months of living expenses before you do either one.

A guaranteed return

Paying down your mortgage is one of the safest investments you can make. It’s a guaranteed return equal to your mortgage rate.

For example, if your mortgage rate is 6% and you pay it down early, you’re essentially earning 6% on your money guaranteed!

That’s a decent rate of return right now.

Returns on home improvements are often more sketchy. Start by asking yourself this question:

How does the value of your home compare to other homes in your neighborhood?

If you’re one of the most expensive homes already, making improvements probably won’t do you a lot of good financially. However, this is your home. It’s more than just an investment. So ask yourself a second question:

How long do you plan to live there?

The longer you plan to stay put, the higher the emotional returns – an important point to consider because money isn’t everything. What types of improvements yield the best financial returns? Most major outlays don’t return much if anything. Cosmetic improvements usually show a better return – paint, new floor coverings, landscaping, and those sorts of things. Remodeling the kitchen or bath can yield a reasonable return, particularly if they look a little outdated, as long as you don’t go over-the-top.

Weighing your options

Determine how much it will cost for your desired improvements. Then ask a Realtor or an appraiser to find out the expected increase in your home’s value. Now calculate your return:

Return = (Increased Value – Cost of Improvements) ÷ Cost of Improvements

Compare that to your mortgage rate. If the return for making the home improvements is significantly higher, you might consider making the improvements instead of paying down your mortgage.

Just keep in mind, this is not an apples-to-apples comparison. Paying down your mortgage offers a guaranteed return. Making home improvements does not.

Choosing between improvements

If they go with the improvements, Bob wants to replace the windows. His wife wants to remodel the kitchen. Which would be better for the money?

We wonder why you want to replace the windows, Bob. Is it for cosmetic reasons or are you thinking about energy-efficiency? Perhaps it’s both.

Stimulus for you

We hate to disappoint your wife, but right how is a great time to replace windows or make other energy-efficiency improvements. The Economic Stimulus Act extended and improved the tax credit for these types of repairs.

You get a 30% tax credit up to a $1,500 limit. So you can spend up to $4,500 on qualified improvements.

A tax credit is better than the deduction you’re used to getting on Schedule A. Deductions reduce your taxes by the amount of your marginal rate. Credits reduce your taxes dollar for dollar.

So $1,500 of your new windows could be paid for by the government!

The one cash outlay that pays you back year-after-year

However, it doesn’t stop there. It’s amazing how much air can leak out through poor windows. You’ll save money on your utility bills for years with the right windows.

Your returns for making any energy-efficiency improvements aren’t guaranteed but they’re close. They may also be higher than the returns on a lot of other investments these days. Improving your energy-efficiency is a cash outlay that pays you back year after year!

Thanks for your bigg question, Bob!

Do you have a bigg question?

Please share it with us by calling us 888.455.BIGG (2444) or sending an e-mail to bigginfo@biggsuccess.com.

Please join us next time when we talk about two recent examples of saying, “We’re sorry.”

Thank you for sharing your time with us today. Until next time, here’s to your bigg success!

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Are You Throwing Money Away by Owning Your Home?

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My Rental Property is Costing Me Money. What Should I Do?

Written on June 19, 2008 by admin in Bigg Solutions, Business, Challenge, Real Estate

Bigg Challenge
Jeff’s job took him several states away from a rental property that he bought about two years ago. He bought the property and fixed it up. Now his tenant is moving out and the place is a mess. So he’s going to have to invest a bunch again. But he feels he has no choice since he has so much in it already. Besides, it’s a bad time to sell real estate. He wants our thoughts on his situation.

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Bigg Advice
It’s been said,

“Find a landlord who lives more than twenty minutes from his
rental and you’ll find a landlord who’s probably ready to sell.”

Properties can be managed across cities and states, but for the most part, real estate is a very local business. And, a lot of people don’t understand that you’re in business even if you only have one rental property.

Consult with a good attorney
You’ve treated this like a business, Jeff. You had your tenant sign a lease. But a lot of landlords feel like there’s little recourse if a tenant tears up the place. However, you can take legal measures against a tenant who causes damage beyond normal wear and tear.

So consult with an attorney to explore your options. There’s a good chance your attorney may handle your case on a contingency. Of course, you’ll still have to cover the courts costs.

Sell!
Check with a realtor, and even other property owners, to get an idea of what to expect if you list your property. Of course, you won’t know until you actually put it on the market, but you can probably make a reasonable guess with some more information.

Sure, we hear news reports that the real estate market is down. However, you may find it’s not as bad as you think. And here’s the thing … isn’t it better to fix it up and let it sit empty than to fix it up just to fix it up again if your next tenant does the same thing?

Distance makes the difference
Every landlord risks bad tenants, but since you live so far away, Jeff, it seems like the best move for you. The only other thing you might consider is contracting with an experienced local property manager to handle the leasing and maintenance.

You sunk my battle ship!
Picture a ship that’s sunk. You can invest money to try to make it float again, or you could just leave it on the bottom of the ocean and get a different ship. Hopefully, you quickly see which one of those two is better.

George said that, unfortunately, he’s learned this the hard way. It’s not easy when you’re the one in the middle of the situation. But the money you’ve already invested is a sunk cost, like the sunken ship. Don’t base your decision today on money that’s already been spent. Base it on what kind of return you can get on the money you will invest. If it’s better elsewhere, cut your losses and move on.

We hope this helps you with your bigg decision, Jeff. Thanks for sharing your Bigg Challenge with us!

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