Tuesday, June 23, 2015

Money stuff: creating a budget

I highly recommend forming (at least) a rough budget as part of the planning for any project. I'm not sure whether it's my project manager self or my tightwad self which dictates this (perhaps both!) but it's a key step in the planning and can inform decisions further down the track. 

Depending on the project this can be pretty easy, but when we were looking at buying a house that needs an overhaul on pretty much every front, the budget creation got a bit daunting. We went through a few iterations, the first of which was very, very rough. I don't seem to have it any more, but it was something like this: 
  • Repiling - $50,000
  • Kitchen - $40,000
  • Bathroom - $20,000
  • Reconfiguration and decor - $20,000
  • Total - $130,000
I can't remember if all of the numbers are what we put down initially but they were along those lines - very high level (though I do know that's what I put for repiling because my dad laughed me out of town when I told him, and then it turned out to be only one corner, not actually a pile and only cost about $1000 to fix). 

That was enough for us to know that it would be worth putting in an offer - and it gave us a rough guide as to what the offer should be. This equation is: 

Potential Value - Renovation Cost = Offer Price

Note that we're not looking to make money (though we won't complain if we do!) - we just wanted a) a project; b) a nice family home at the end; and c) not to be throwing money away. If you were trying to do up a house for profit you'd want a significant margin in there as well - though you'd also likely not change some of the things we're changing and therefore you'd spend less. 

Once we'd negotiated and agreed on a price with the vendor, we got a building inspection (actually, we talked one of the companies that had provided the building inspection to an earlier bidder into providing the same report to us for a discounted price, since they didn't have to revisit the property). 

When we had the building report in our hot little hands, we added every defect needing to be addressed to a gigantic list, and assigned costs to each one. 

Most of the numbers are very approximate - generally we put $1000 per day of work (which usually covers some materials as well as labour) unless we had a better idea. 

We also checked the scariest looking problem - cracks in the retaining wall at the back of the house - with an engineer. If that had required work it probably would have been $50k, which would have been a deal-breaker. 

The total (after we'd added renovations, with a bit more detail and verification - i.e. I asked my dad, which is the standard sanity check process around here) came out at $130,120 (that over-estimated pile repair ended up covering a bunch of other remedial jobs). 

This list is now our master to-do list and budget. 

A snippet of our budget / to-do list
Because I like to see how we did on our forecasts (I always liked tests at school, too; weird, I know) our initial estimates (the "Approx cost" column) is now locked down. The grey lines are things we've completed, and as you can see we're not too accurate on the line-by-line - but overall we're still about even. 

(installing the dishwasher actually cost about $40 but it was the same receipt as paint for the kitchen and I'm not that dedicated to separating the costs)

I have also categorised and prioritised each task. This helps us see, for example, all the costs associated with the new kitchen, and how much money we need to have within the next few months for the high priority items, vs in a year or two for the things further down the list. 

It might be a bit over the top but hopefully it means we won't get any nasty surprises - and it is a bit sobering seeing those numbers adding up so it probably makes us a bit more careful too. 

So tell me - how do you plan your budget for projects? Or do you prefer to just do it and hope for the best? ;-) 


  1. Hi Rosa, what a great blog. It's so generous of you to share your knowledge and experience. I have some novice-type questions...How did you come up with your original estimates of the renovations? Any tips/resources? I'm also quite curious about the fact that you sought the building report after agreeing on a price...Is this standard in a PBN situation? PS I used to work with H, say hi to him for me please!

    1. Hi Evealyn, lovely to hear from you!

      My original estimates were very rough, and based on my understanding of normal spend for kitchens and bathrooms, and some very high level, pretty padded estimates for the other bits. There's not a great deal of science there - anything I'm not sure of I usually ring my dad and say "do you think $5000 is enough for carpet?" because he has more experience than I do. Sorry that's not tremendously helpful, but it's one of the reasons I wanted to share numbers here - to give folk a bit of an idea what the costs really are.

      And yep, that is the normal sequence for building inspection, even though it's a bit illogical; they cost about $600 so generally you come to an agreement on price first, making it conditional on the building report, and then if there are any costly surprises in the report you can try to renegotiate. In our case there weren't any significant items in the report that we hadn't already observed so it was easy. :-)