Question: When is it a good time to call it quits about doing makeovers or add-ons to a second home? How much equity in a home should one have and keep, and how much of the equity should be put back into the home?
-- Elizabeth M. Sullivan, East Manatee, Fla.
Answer: In the dinosaur days when I bought my first home, lenders used to require a 20% down payment. That was more for their protection than anything else, since buyers with a big equity stake in their homes would be less likely to cut and run should hard times hit.
But it's not a bad rule of thumb, especially in a market like the current one, where home prices overall dropped 4.5% in the third quarter over the year before, according to the Standard & Poor's/Case-Shiller U.S. National Home Price Index. Though you won't have extra money to invest in other, perhaps more lucrative investments, keeping a big equity cushion makes it less likely that you will wind up "upside down" in your home, meaning that you'll owe more on your house than it's worth, should the housing market continue to fall.
That's assuming, of course, that you plan to keep your house for a few years, until the market rebounds. If your goal is to renovate it and sell it quickly, then it may make sense to extract whatever equity is needed -- and no more -- to make repairs and upgrades necessary to make the house competitive.
But I recommend staying on the conservative side, especially since it's a second home. Forget the pricey add-ons, unless you are bringing it up to modern standards by adding a second bath to a one-bath house, or a third bedroom to a two-bedroom house. Instead, stick to inexpensive cosmetic upgrades, like new paint and siding. For kitchens and baths, buy stock cabinets and faucets, rather than custom, and stay away from items that are easily damaged, like glass vessel sinks and fragile chandeliers. I also suggest purchasing mid-range rather than top-of-the-line appliances (check Consumer Reports for good buys), and laminate countertops rather than granite, unless the home is in the upper brackets. Buyers don't expect the same levels of quality in casual second homes that they do in primary ones, though they do appreciate having everything fresh and new.
In two areas, though, it makes sense to splurge: Flooring and windows. Floors in vacation homes are often a mess, suffering from tracked-in sand, mud and spilled beer. So it makes sense to upgrade to durable hard surfaces like ceramic tile, slate or stone. And impact-resistant windows in hurricane-prone areas, or energy-efficient windows in ski country, can be big selling points.
Whatever you do, keep in mind that you probably won't get back all of the money you've invested in upgrades. For a list of typical paybacks for remodeling jobs, see Hanley-Wood's Cost Versus Value report. So keep your plans simple -- after all, who wants to waste good beach time waiting around for contractors to arrive?