Does Investing In An Addition To My Main Line Home Make Sense?

Exiting around the circular drive of the expansive Radnor home, A the words "We need to move quickly, there's a bidding war going on here," haunted my subconscious. Was my client serious? The home we had just measured was listed for $1,750,000.00 and she was asking me to design an expensive addition. The announcer proclaimed that it was 5:55 and time for the business report. The Dow was down again. Then it hit me. Home prices around the country where markets had doubled every three years were seeing massive retrenchment but Philadelphia on the other hand had experienced a slow steady advance. Was it possible home values along the Main Line had held up?



The next morning I searched for data. The S & P Case Shiller Index doesn’t cover the Philadelphia MSA but I did find that the National Association of Realtors published some data.


Median Sales Price of Existing Single Family Homes for the Delaware Valley

2004 $185,100
2005 $215,300
2006 $230,200
2007 $234,900
2008 $231,400 +25%

Wow, that’s impressive. I assume that unlike other more volatile markets in the U.S. that Philadelphia MSA never really heated up and over inflated. And since it never overinflated, it also hasn’t suffered a dramatic downturn. This data would lead me to believe that the investment in my home is safe.




So I plotted the Dow over the same time period. Yes indeed, my suspicion was correct. Home values had held up while stocks had plummeted.




Dow Jones Industrial Average

2004 10783.01
2005 10717.50
2006 12463.15
2007 13264.82
2008 8776.39 -18%

So with mortgage rates hitting record lows and with the commodities that are required to manufacture building materials like copper and oil dropping like a rock, the cost to make significant improvements to my home have never been cheaper.

Refinancing to borrow $100,000 to invest in my home at 5% will increase my monthly payment by about $450.00. And the interest paid will be tax deductible; net of the new 39 % Federal tax rate in my case the effective monthly payment is only about $300.00.

With the Federal government planning to borrow more than 10 percent of GDP over the next couple of years, deflation will soon be a concern of the past. A dramatic devaluation of the dollar, higher interest rates and inflation are on the horizon; three more excellent reasons why moving now to invest in a tangible asset like a home make sense.

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Sure Photovoltaic Power makes sense in Scottsdale but is it a viable solution in Chester Springs or Gwynedd Valley?

With electric deregulation coming to Pennsylvania, I’ve been wondering whether solar technology makes sense here. It powers my calculator and trickle charges my boat battery but can it make a positive impact on my annual electric bill along the Main Line?

So what is a solar photovoltaic or PV system?

Simply stated, PV systems convert sunlight to electric current. PV systems that are interconnected to the utility company are often referred to as net-metered. So when net-metered systems are creating a surplus of electricity it can be sold back to the utility company at the full retail rate for each kilowatt-hour produced.

What are the components of a PV system?

Along with a series of photovoltaic panels that are normally mounted on the roof (referred to as an array), the direct current or DC that is produced is routed by wires then combined before entering an inverter that transforms it into alternating current or AC. The alternating current is either used immediately or run into a separate meter spinning it backwards earning a credit from the power provider.

How much alternating current will my Delaware Valley PV system generate?

The amount of electricity that is generated is unique to every installation. Some of the factors include: the tilt of the modules, their orientation in relation to due south, shading from trees and other obstructions, the design wattage of the modules, along with the inverter efficiency and system losses.

Using the PVWATTS program (version 1) of the National Renewable Energy Lab www.nrel.gov/rredc I determined that a 4kW nominal system in Montgomery County PA can be expected to deliver 4775 kWh of alternating current annually or 1193.75 kWh of alternating current for every nominal kW of PV system.

Are there any government programs to help pay for PV?

On July 9, 2008, Pennsylvania Governor Ed Rendell signed into law the Alternative Energy Investment Act which, among other things, will provide $100 million in grants for solar photovoltaic systems and solar water heating systems for homes and small businesses. The legislation also provides $80 million of support for larger solar installations and solar companies.

The residential and small business program will be managed by the Pennsylvania Department of Environmental Protection, which is now working to design the new program. Sources within the Solar Working Group in Harrisburg expect a 35% rebate. The PA DEP has created a webpage for interested people to enter their email addresses for receiving email updates about the status of these new programs. Please visit www.ahs2.dep.state.pa.us/aeifsignup/ to sign up for these program updates.

Included within the Federal Emergency Economic Stabilization Act of 2008 which was signed into law by President Bush on Wednesday October 1, 2008, was some renewable energy legislation. This is great news for individuals interested in solar power. Not only was the 30% commercial solar investment tax credit extended through 2017, but the same tax credit was extended to residential installations also.

Under this new legislation the previous $2,000 cap for residential solar installations is eliminated. This means that starting in January of 2009 the purchase of a residential solar electric system will make you eligible for a tax credit equal to 30% of the cost of your solar system, including installation.

So how long would the payback of my investment take?

Steve Buerkle of SunGlow Solar http://sunglowenergy.com estimated that a roof mounted PV system would cost about $11.00 per nominal watt of power. So a 4kW system would cost $11.00 X 4000 W = $44,000. Assuming a 35% PA rebate and the 30% Federal tax credit:

Installation Cost $44,000.00
Less 35% PA Rebate ($15,400.00)

Sub Total $28,600.00

Less 30% Federal Tax Credit ($8,580.00)

Sub Total $20, 020.00

Annual AC power produced 4775 kWh

Average Annual payback $923.43

Years to payback 23

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How can I get the government to pay for reducing my carbon footprint?

Easy!

Before leaving office President Bush signed into law new consumer tax credits for energy efficiency home improvements, as well as purchases of plug-in hybrid vehicles. These provisions were included in H.R. 1424, the Emergency Economic Stabilization Act of 2008, which the President signed on October 3, 2008. The homeowner tax credits are largely the same - but not identical - to those that expired at the end of 2007, and begin again on January 1, 2009.

Taxpayers who claimed some but not all of the $500 Federal income tax credit for energy efficiency home improvements that was in effect in tax years 2006 and 2007 may utilize the unused portion in 2009.

What is a tax credit?

You don't receive an income tax credit when you buy the product, like an instant rebate. You claim the credit on your federal income tax form at the end of the year. The credit then increases the tax refund you receive or decreases the amount you have to pay.

What is the difference between a tax credits and a tax deduction?

In general, a tax credit is more valuable than a similar tax deduction. A tax credit reduces the tax you pay, dollar-for-dollar.Tax deductions - such as those for home mortgages and charitable giving - lower your taxable income. If you are in the highest 35-percent tax bracket, the income tax you pay is reduced by 35 percent of the value of a tax deduction. But a tax credit reduces your federal income tax by 100percent of the amount of the credit.

Taxpayers who claimed some but not all of the $500 federal income tax credit for energy efficiency home improvements that was in effect in tax years 2006 and 2007 may utilize the unused portion in 2009.

You can get a one-time income tax credit of up to $500 in total for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in your home.

Who gets it?

Individuals who install specific energy-efficient home improvements.

What energy-efficient home improvements are eligible?

The overall $500 cap can be reached in several ways with the purchase and installation of energy-efficient products:

• Exterior windows: 10 percent of the total cost, up to $200. Includes skylights and storm windows.

• Insulation, exterior doors, or roofs: 10 percent of the cost of the product (but not the installation), up to $500. Includes seals to limit air infiltration, such as caulk, weather stripping, and foam sealants, as well as storm doors.

• Central air conditioner, heat pump, water heater, or bio gas (e.g. corn) stove: up to $300 towards the full purchase price, including installation costs. Starting in 2009, geothermal heat pumps are instead eligible for a separate tax credit for 30 percent of the cost up to a maximum credit of $2,000.

• Furnace or boiler: up to $150 towards the full purchase price, and/or $50 for an efficient air-circulating fan in a furnace, including installation cost.

In addition, to be eligible for the federal tax credits:

• Windows, doors and insulation must meet the requirements for your region of the 2001 or 2004 International Energy Conservation Code, a model energy code for buildings. All ENERGY STAR windows qualify.

• Roofs must be metal with pigmented coatings or asphalt with cooling granules that meet ENERGY STAR requirements.

• Heating and cooling equipment must meet stringent efficiency requirements – not even all ENERGY STAR products will qualify.

• Also, windows, doors, insulation, and roofs must be expected to last at least five years (a two-year warranty is sufficient to demonstrate this).

• Manufacturers can certify (in packaging or on the company's web site) which of their products qualify for the tax credit. All the improvements must be installed in or on the taxpayer's principal residence within the United States. Condo and co-op improvements are apportioned to the owners. The credit cannot be taken against the Alternative Minimum Tax (AMT).


When are they available?

The home improvement tax credits apply for improvements "placed in service" from January 1, 2009, through December 31, 2009. They are not available in 2008, but mostly were available in 2006 and 2007. The IRS defines "placed in service" as when the products or materials are ready and available for use - this would generally refer to the installation, not the purchase.


What do I need to do to get the tax credit?

You will need to file IRS Form 5695 with your taxes. In addition, you will need
to keep at least receipts proving that you purchased the improvements and a copy of the manufacturer's certification (or the ENERGY STAR label for windows).


Ask your accountant or tax advisor for specific guidance. This information was gleaned from available public documents and is offered in the interest of promoting conservation and is not meant as taxation advice.

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How To Make Big Money By Not Moving

If you’re 50 or over like me, at some point you’ve considered leaving Main Line home where you’ve raised your family for one of those one-floor compact models in a 55 and older community that you believe will be more manageable. You’ve dreamt out loud about the tropics. Your spouse whined “It’s too hot in the summer,” and you countered with “How ‘bout a cabin in the mountains as well?” Then you relented, figuring with the state of your 401K you’re going to need to work into your seventies, and started to look around Chester County with your friend the Realtor. Hey, at least looking might be fun? Then she drove you twenty miles out to where the builder’s prices matched your budget.

But have you ever really thought the arithmetic through? Let’s say you believe your home is worth $700,000 but your friend the Realtor told you it would probably sell for $600,000 today, now that prices have fallen. That’s 15% less than one of your neighbors got two years ago. But that was then and this is now.

You were planning on spending less, but you deserve nice things, even if the new place is small. After adding the tumbled marble backsplash, farm sink, pot fill, six burner cooktop and granite counters, the new place came up to $400,000. Ok, you can still stuff some money under the mattress after you pay the closing costs.

But $400,000 is just the beginning. You’ll need to add $5,000 for new drapes; none of the new neighbors really wants to see you naked. And $5,000 for the moving company. You weren’t really going to call a couple of buddies and rent a truck.

Real landscaping will probably run $20,000; the builder’s just going to install a few twigs. You promised yourself you were never going to stain a deck ever again but a small patio with a symmetry pattern in segmental pavers would only run about $10,000 and then you could bring the patio furniture.

The builder leaves the walls painted white. So you cleverly assessed you’d have that painter come in and do the colors now. Without furniture that should probably run around $4 per square foot. Another $10,000.

You’ll need a new refrigerator to match the stainless steel appliances the builder threw in for free. New homes don’t come with refrigerators or washers and dryers. What a jip! That’s $3,500. And you can’t bring your antique washer and dryer. Add another $2,500 for those front load jobs in red!

Your spouse’s clothes will never fit on one flimsy ventilated shelf. You’d better call the closet guy who put the shelves in your big walk-in closet. It was about $2,500; this small one should only be $1,500.

After the yard sale, you’re going to be stuck with a lot of junk. Better figure on a dumpster and that cleaning service. After the movers load up all the furniture from home, you can’t just leave it that way. No problem, just another $1,000.

I wonder what the buyer’s home inspector will find, the leak over the garage or the breaker that trips and won’t reset? He’ll definitely write you up for those six windows that lost their seal. And the one that rotted out at the bottom. Better figure another $10,000.

Wow that’s getting expensive!

Reduced Sales Price Current Home $600,000

Deduct: Real Estate Commission $ 36,000
Transfer Tax $ 6,000
Repairs $ 10,000
Dumpster & Cleaning $ 1,000

Net Price Received $547,000
New House with Options Cost $400,000

Add in: Window Coverings $ 5,000
Moving Company $ 5,000
Landscaping $ 20,000
Patio $ 10,000
Painting $ 10,000
Closet Shelving $ 1,500
Refrigerator $ 3,500
Washer & Dryer $ 2,500
Transfer Tax $ 4,000
Title Insurance $ 2,300
Apportionments, etc. $ 1,700


Total Actual Cost of the New House $465,500

Money Actually Stuffed Under the Mattress $ 81,500

I’m brilliant. I’ve traded a $700,000 asset for a $400,000 asset, and got paid $81,500. I only lost $218,500; maybe I should change careers and become a financial planner!

Why did I want to move anyway…accessibility? Some day one of us won’t be able to climb stairs. The appliances were getting old, becoming way too expensive to run. And the new place comes with those new low flush comfort height toilets and grab bars. Oh, and the washer and dryer are on the main level, no more carting clean clothes up from the basement two floors. I wonder what it would cost to update your current home and make it accessible for life.

Install Elevator $ 62,000
Install 3 Comfort Height Toilets $ 2,200
Install Grab Bars in Our Bath $ 1,200
Install a larger powder room door $ 900
Remodel 2nd Floor Attic into Laundry $ 15,000
Replace the Dishwasher $ 800
New Granite Counters $ 13,000
Tumbled Marble Backsplash $ 4,800
Modify a Cabinet and Install a Farm Sink $ 2,600
Modify another cabinet and install
6 burner cooktop (with new gas line) $ 7,600
Repairs from inspector’s list above $ 10,000

Total Fix-up Cost to Stay $120,100

$120,100 X 68% (Average Cost Recouped*) $ 81,688
Value of my home in a normal market $700,000

Total Value of Remodeled Home $781,688



*Average of Upscale Projects from Remodeling Magazine Cost vs. Value 2008-9

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