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Home Articles IKEA - Why IKEA? DIY IKEA - How to Make Money in a Soft Housing Market
DIY IKEA - How to Make Money in a Soft Housing Market PDF Print E-mail
Written by Kelly   
Thursday, 06 November 2008 13:50

An IKEA Kitchen is a Good Investment

diy-ikea-kitchen.jpgI spend a lot of time thinking about my finances- it's true. Regardless if you do or not, I'd like to share my thoughts about why the current housing market makes an IKEA kitchen a better move than ever before.

Everyone contemplating a remodel is or should be familiar with the resale value of typical home renovations, with kitchens, bathroom, exterior siding renovations returning some percentage (50-85%) of the investment. This tool is handy for understanding these guidelines:

REMODELING Online - Cost Value

And of course, we are all familiar with the unimpeachable rule of investing: buy low, sell high. There are 2 ways to do this with housing:

1. Buy and hold, with housing naturally increasing with value over time

2. Buy and improve, with improvements increasing the value

In both cases we are talking about the margin- the difference between what you paid, with expenses such as interest payments, maintenance and improvements, and what you received at sale. The first is time value and the second is added value.

Maintain the Margin in Home Improvements

Wait a minute, the US housing market is in the tank! Many people paid more for their houses than they could now turn around and sell them for; and even if they did not pay too much, they will have to wait much longer for that home to appreciate significantly. So, it's time value that's in the tank.

Which leaves you with adding value, which provides you with two great outcomes: 1) enjoyment of the asset while you live there 2) the only way you have of adding to the value of your home.

In the current market, buyers are looking for deals, which means that they want discounts on value- they want to cut into your margin.  So, falling home prices require that home improvements must be economical- you must maintain the margin in your home improvements, despite buyers taking discounts on it. How do you do that??

DIY Can Help You to Build in More Margin

DIY is an outstanding way of building more margin into your home improvement investment.

A mid-level kitchen renovation is expected by the market to cost $20k. That means that your kitchen looks like others that cost about $20k. This is how real estate valuation works- comparables, not actual cost. Labor costs are 40% of that $20k (probably higher than that, but let's be conservative). Let's say you get a generous 80% of that $20k investment back in resale, so $16k. You lost $4k.

If you eliminate the $8k (40%) of labor costs, so your $20k kitchen cost $12k and you get $16k out of it. You just made $4k.

So that's DIY. What if I don't have the skills or the time to DIY?? What about IKEA?

DIY IKEA? I Can't!

My IKEA kitchen reduced the cost of my renovation by half, with some labor hired out. If you poll the people on this site, you'd find similar numbers.

In this example, I'll still use the midlevel kitchen remodel which looks like others costing $20k, and which you can expect a resale value of $16k out of. Remember this is how real estate valuation works- comparables, not actual cost. I'm still assuming that the materials make up $16k of the $20k expense as in the original example.

But, with IKEA, this kitchen will cost you $8k, or 50% less than the $16k of materials in the first example. Remember, there is $4k on the table for labor which you can retain by doing it yourself (the work is the same regardless of what kitchen you choose). So, if you hire someone to do your IKEA kitchen, you will pay $12k ($8k materials + $4k labor=$12k). Remember, the $16k resale value is for kitchens that look like those which cost $20k. In this example, an IKEA kitchen installed by a professional nets you a margin of $4k.

Let's go over that again: Build in a profit margin of $4k (IKEA with an installer) OR build in an upfront loss of $4k (other cabinets with an installer).

You Come Out Ahead

There's another issue...where would the $20k come from? Most of us would have to take a loan. That'll cost you 7.5% annually (I'm not going to go into deductibility of home improvement loans- if you can figure out that benefit to yourself, you don't need to read this). Let's say you live in the house 3 years, that's an additional $4,500 in interest costs ($1,500 x 3). The $20k kitchen now costs $24,500- you've now built in a loss of $8,500.00 ($24,500 cost - $16,000 resale value).

A $12k loan at the same APR will cost you $2,812 over three years- so that $12k IKEA kitchen professionally installed will cost $14,812- you've STILL built in a gain of $1,188, even if you finance (at a reasonable rate- if you finance on a credit card at 24%...well, that'd cost you $8,640 in financing over three years, or $20,640, which builds in a loss of $4,640- STILL 46% BETTER THAN THE ORIGINAL ASSUMPTION of a loss of $8,500 @7.5%!).

And of course, DIY with IKEA means even more margin. So, let your buyer think they got the better of you at closing- it won't cost you ANYTHING to let them think they won.

View the discussion thread here: Why IKEA? Because Resale Demands It!