Oh, how do you decide what you have to do and what you cannot do? Safety first. Safety of the people in the house and safety of the house. If the situation is causing the house to deteriorate, it gets done ASAP. Bad roofs, soffits, gutters, stupid remodeling mistakes where the previous owner did something that violated the integrity of the house. This might include a leaky bathroom with moldy walls. Next, I go for energy use. Insulation and window replacement (if needed). Then you can go for livability. This is where the kitchen remodel or changing walls comes in. You might be able to do some of these things, or do them on a limited basis if you use less expensive materials or do the work yourselves (if you have the skills). If you have high home appreciation rates, and you can put whatever you want into your house and get it back at sale, then do what you can afford and like.

You only have a half-bath? Like no shower or tub?

So, the question of when it is worth it or not. It really depends. All houses need maintenance and repairs, even brand new ones will have maintenance and repairs in time, or even things right away. That is just one of the costs of home-ownership

Are the upgrades going to be ones you can recover on resale? Not likely on most them, as most people expect for example basic safety requirements to be met - a safe and functioning porch and an approved oil tank. People won't pay more for "bones" they expect to be there, but they won't necessarily pay less for "bones" that are missing either as like you, they know they can soon find themselves in over their head to get things to where they are safe and functional. There is a risk you spend far more on basic repairs to get this house to "safe" than you could ever, ever get back on resale. There is a point where a tear down and rebuild becomes the more financially feasible option.

What are comparable (but updated) homes on comparable lots selling for? Will spending the amounts you are looking at spending put you at no higher fair market value, but an awful lot of sunken costs? If so, might be better to sell and try and buy one of those better maintained homes.

Did you get a home inspection before buying? Better to get one before you pull trigger on a purchase, but even getting one now to get an idea of what you might be facing, instead of finding out piece by piece as you go to repair things, may be a good idea. Then you can really decide if it is worth it.

Another thing to remember about selling your home. Many states have some sort of seller disclosure statement that you have to make when selling your house. It states the known defects of the house. It is what I was referring to when I said that with the oil tank you may have recourse to go back and sue the seller. If the house's heating oil tank could not be filled, how could the seller not know such a thing? So... Since you know that the porch is not built up to proper standards you cannot ignore that and sell the house. If your state has this seller disclosure law, you are obliged to tell the buyer (prospective buyer, because the disclosure is given to the buyer when an offer is made and before the deal is finalized). You have to list all the problems that you are aware of in the house. So once you have an inspection done and know all the problem, you are obliged to tell them all to the next buyer if your state has this law.

What does a small house in good condition on a comparable lot in the town cost? Do you have room to expand the house/bathroom, and do you want to do that?

You have to weigh the cost of getting the house up to your standards against the cost of that "ideal" house and the costs of selling and buying (if the "ideal" house even were for sale). Zillow may be a little helpful in giving you an idea of what a house not for sale is worth. Often, you can look at homes on the city assessor site online. There, you can see what any property in the town has by way of bathrooms, bedrooms, and square footage. In some towns, you can see this for any house, other towns you can only see your house, yet other towns have none of this public. In my town, I can see the bathroom and HVAC info for a home, though it may not be up to date. I can also see all the building permits pulled. That gives me more info, yet.

So, between all these sources, you may get an idea of what a similar house is worth. Or an idea of what other houses around you have, and if you are "over-improving" for your area.

Didn't you see any homes in the area in good condition when you were house hunting? How much more expensive were they? If you paid less, think of these repairs as things you are paying to bring your house up to par, but payments that you are not going to carry for 30 years on your mortgage, paying interest on for 30 years.

Regarding the bathroom description, it is known as a 3/4 bath, but in many markets it is considered a full bath. So you have a 2 bedroom, 1 bath home on a desirable lot that you love. It is important that you love your location. The rest can be fixed over time.

Sounds like the inspector was not a good inspector if he was unable or unwilling to provide the porch failings, if any, in the inspection report.

It also sounds like the seller failed to disclose to you a couple of very expensive defects: the water in your crawlspace and the buried tank. These are items that you can sue the seller for in states where disclosures are required as mentioned by another poster. You may or may not want to check into your remedies for the non-disclosure items.

As to how much to spend on repairs - that is a more difficult question. How long do you plan to stay in this house? If you plan to be there for the long haul, then you can spend more of your funds repairing and remodeling to better suit your needs. "Long haul" varies from market to market and from person to person. For some people it might be 5 to 10 years and others it might be more than a decade. This is something you both need to figure out and you may need additional info in order to come to a solution.

Repairs need to be done on all homes. Some people keep their homes in excellent condition and others let repairs slide. We call this deferred maintenance. In general, the longer you put off a repair, the more expensive it becomes because it is then a much larger job.

There are some things you can do to make sure you don't outpace the neighborhood. Have a master plan for repairs and renovations so you don't suddenly get the bug to do something expensive and/or wild :) Also, check with an excellent Realtor that knows your neighborhood well so you can see what X improvement will add in value to your home. As an example, if your neighborhood is filled with homes with 3 beds/2 baths and you have a 2 bed/1 bath, adding another bed and bath is likely to add tremendous value to your home. But will it cover the cost? You need to see the projected new value and the projected cost plus have a need if you decide to go with that large remodeling. On the other hand changing a 3/4 bath to a different type (different materials and/or different size) may or may not add value.

The longer your timeline in this home, the more flexibility you have with remodeling and repair dollars.