I am thinking about adding a bungalow to my property....?
I've found a plan for a bungalow which matches the architectural style of my house very well and will add approx. 480 sq ft of living space to the total property. We live in a semi-mature neighborhood with property prices in the 180s to 240s and square footage from 1700 to 3000. Spatially and from a landscaping perspective, the bungalow would work well in my backyard and still leave me a large, grassy area for baby #1 (here) and baby #2 (planned) to play in. I'd use the bungalow for an office and guesthouse. The approximate total cost is about $50K. I purchased my house for $146K and it has been appraised at $156K. We've made some very cost-effective, DIY improvements in the home and it is architecturally in line with the higher value homes in the neighborhood. This addition would bring my total living area to approx. 2000 sq ft. My question is...financially, would this addition make sense? All opinions and thoughts would be appreciated!!
Cool idea! There are three questions that you left unanswered that would play into your decision. First, how much did you already invest in your DIY projects? Second, how long do you plan to stay there? Third, what features do the $240k houses have and how does that line up with yours?
Keep in mind, a home is personalized. What brings you great value to a home may not bring value to the next person and could even be considered a detriment. Pools are a good example of this. For some people, they feel like they hit the lottery when they find a house with a pool. For others, they feel like they are getting into the biggest safety hazard and liability they've ever gotten into.
More on the concept that a house is not an investment comment. I used to think it was an investment until I began reading the Rich Dad Poor Dad series.
Look at your house over it's lifetime in your hands, however long that may be.
Over the life you've owned your home, how much total did you pay out in closing costs, down payment, mortgage, taxes, insurance, repair, and improvements? Literally. How much of your paycheck had to go out over the past years to pay for this home. Now, deduct the annual portion of your income tax that you got back from the IRS for deducting your mortgage interest (just the part of the tax that your mortgage interest deduction cause you to receive). What came out of your pocket total is your cash investment in your house so far. Deduct your selling price and you have your "true" gain or loss.
For example (this assumes a 30 year mortgage, 6% interest, 25% income tax bracket, and 5% down): To purchase $146k house.
$ 5000 closing costs
$ 7000 down payment
$10000 improvements
$ 5000 repairs
$8200 amount applied to principle ($138 month x 5 years)
$31275 interest less 25% return on income tax ($695 x 5yrs)
Total investment out of pocket = $66475
House sale price $180000
Payoff mortgage $129000
Gain $51000
Less Real Estate Sales fees 6% $10800
Less investment out of pocket $66475
Net LOSS on this home -$26275
Now, let's add the bungalow and assume you finance it and assume it is attractive to buyers and that you fall in the high end of the sales spectrum now.
House sale price $240000
Payoff mortgage $129000
Gain $111000
Less Real Estate Sales fees 6% $14400
Less investment out of pocket $66475
Less investment into bungalow $2100 Principle
$14985 Interest (Equity loan at 8%)
Net Gain on this home $13,040
Now if you'd have invested the $17085 out of pocket ($2100 principle + $14985 interest) at 8% over those same 5 years, you'd have about $24k in the bank.
You've got two things to weigh here, would it serve you better to invest the money you'd be putting into the bungalow and then later buy a home that will meet all of your needs, or do you need to make the investment for your sanity and happiness.
I hope this helps you decide.
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