Cost vs. Value: Making Home Remodeling A Slam Dunk
Having been through a four-year remodel that turned our once-duplex into a single family home, I know a little something about home renovation. And I’ll tell you that it’s no picnic. There are loads of choices to make, and it can be exhausting. And the last thing you want to do is to sink way more money into your home than you’ll ever get back out of it.
That’s why it’s important to look at not just the cost of a potential home renovation, but the way that renovation will increase your home’s value.
In my family’s case, many of the renovations we did were not negotiable. The upstairs bathroom had a huge hole in the floor when we bought the house, and the wiring was more than fifty years old. Clearly, we had work to do there.
But we were careful not to out-improve the area our home is in. We could have gone all out on fancy fixtures and finishes, but we didn’t. Partially because we didn’t want to lay out the cash, of course, but also knowing that should we have to sell the house, we wouldn’t get our money back on the expensive stuff.
So how can you figure out exactly what a home project is likely to cost, and what kind of value it will drive in your home’s potential resale price? And should that be the only thing that factors into your decision of whether or how to renovate? Let’s talk about it.
Cost vs. Value: Running the Numbers
One way to figure out which improvements will give you the biggest ROI is to check out the annual Cost vs. Value Report from Remodeling magazine. The comprehensive report compiles extensive data on home improvement costs versus the value they drive in various areas of the country. You can look at national averages or, better yet, drill down to your specific area.
The report will tell you what it is likely to cost for you to complete a certain type of renovation. Then it will tell you the average resale value of that particular renovation.
For instance, on a national average, it costs about $1,826 to replace an entry door with a new steel door. And the average resale value of that upgrade is $1,368–a 74.9% return on investment. Or you can replace your garage door for about $3,611. That has an average resale value of $3,520–a 97.5% ROI.
Some enhancements, like adding a master suite, have about a 50% return on investment. So if you’re planning to sell any time soon, you’ll want to steer clear of renovations like this, if at all possible.
With this said, your mileage may vary. You’ll want to check out the numbers specific to your area to get local data.
Cost vs. Value: Reducing the Numbers
One thing commenters point out about the Cost vs. Value Report is that it seems to assume the renovation includes paying for labor and using fairly upscale materials. After all, they put the national average cost of a major kitchen remodel at $66,196. There are houses in my neighborhood that have sold recently for less money than that!
This report is a good place to begin, but you’ll want to factor in the real numbers of your actual renovation when making your decisions. For instance, maybe you have a terribly outdated kitchen.
But you can do some of the remodeling work–especially the demolition work yourself.
And you choose mid-range appliances and finishes that look nice but don’t cost an arm and a leg. Suddenly that $60,000+ renovation actually only costs you $30,000. And there’s a chance your major overhaul will add more than that to the value of your home.
There are typically many ways to bring down the overall costs of a renovation project. Shop for appliances at the scratch and dent store. Get your hardware and lightning from a Habitat for Humanity or another resale shop. Leverage sales at your major hardware chain. And do as much of the labor as possible on your own.
By reducing the upfront cost, you’ll see a better ROI on the project in the end.
Finance Your Home Improvement
Your numbers are making sense? It is time to consider your financing options. You can finance your home remodeling in the old way by borrowing money from friends or family, get a loan from your bank/credit card. On the other hand, you can do this in the 21st-century ways, by checking out online lenders like: EVEN or SoFi and compare hundreds of competitive financing offers.
Other Factors, Too
Of course, when we’re talking about renovating your home, we generally aren’t just talking about a soulless piece of real estate. We’re talking about the place where you live your life. And unless you’re planning to sell in the very near future, deciding when and how to renovate won’t be completely about the numbers. Here are other factors to consider when deciding whether or not to renovate your home:
The Quality of Life Factor
Some renovations are worth taking a financial hit to complete, and some just have to get done. For instance, the ROI on new siding for your home isn’t great. But if your old siding is cracked and letting water leak through to your walls, it’ll have to be replaced whether you like it or not.
Other improvements are really more about your personal quality of life than they are about your wallet. Sure, you want to make reasonable financial decisions. But it can be worth putting some money into your home to make it a place you truly enjoy living.
If you love to cook, this might mean a simple kitchen remodel that allows for more space to prep and nicer appliances. Or if entertaining is your jam, a back yard patio with a fire pit may make your life even better. Maybe you have mobility issues or a child with special needs. In this case, you can’t put a price on the types of improvements that allow for independence and overall higher quality of life.
You don’t have to drop a hundred grand into a better kitchen just so you can play chef. But you can make reasonable upgrades to your home just because they make your life better or easier–not necessarily because they’re a good financial investment.
How Long You’ll Stay
With that said, you should be the most concerned with the financial piece of this equation if you are planning to move out of your home sooner rather than later. If you’re moving within the next five years, weigh any improvements very carefully. Otherwise, you might dump money down the drain for no real reason over the long-term.
If you’re planning to sell soon, focus on investing in high-impact places, but do it as cheaply as you can. The less money you put into a house you’re going to sell soon, the more you’ll get out of the house when you do make that move. And that just gives you more money to make your next home purchase your dream home.
On the other hand, if you’re going to stay in your home for a decade or more, making a quality of life improvements may make more sense. And the ROI equation may be thrown off somewhat. So keep that in mind as you’re thinking through the financial consequences of this decision.
What Your Neighborhood is Like
Finally, keep in mind that the Cost vs. Value Report focuses on larger urban areas across the U.S. They can’t run a report on every small town or even a smaller city. So always take the information in a report like this with a grain of salt.
The best place to look, instead, for high-ROI project is at your own neighborhood. Pay attention to the homes that have recently sold. What features do they have that your home doesn’t? An upgraded kitchen? A nice front porch? Real curb appeal?
Bringing your home up to par with others in the neighborhood can be a good way to get a return on your home improvement investment. But you also don’t want to out-upgrade your neighborhood. Go too far, and you’ll find yourself out-pricing your neighborhood, which isn’t a great place to be when you’re trying to sell.
Deciding to upgrade your home can be great. But it’s a tough decision, one that a lot of money often rides on. So be sure you are thoughtful in how you approach this decision, and use tools like the Cost vs. Value Report to make a more informed choice.
Did any upgrades you made to your house pay off when it came time to sell? What home improvement projects will you work on this year?
That website is a great resource! Even though the costs might not account for DIY labor, it does tell you what renovations in your area bring back the best average return. Important for anyone looking at spending some renovation money or buying a fixer upper!
I generally agree with these estimations and also with the comments of others. These estimations do have their limitations.
One of the limitations of these estimates is the relationship between the type of house and the quality of the upgrade. A Viking range would be overkill in a $200,000 house but appropriate in a $1,000,000 house. You would probably recoup more of the investment in the latter case.
Also, an upgrade should benefit the current owner. We live in a time when a house is no longer considered a home but an investment. But really, one’s house is also one’s home. When we start looking at our houses as homes again, we will keep our houses in good shape and upgrade them as necessary because of our pride of ownership.
When I was looking at houses I had the price, the size of the house, and the neighborhood in mind. If there were 2 houses in the same neighborhood of the same size I wanted the house that would be cheaper. If the features of the more expensive house were worth less than the difference in price, I didn’t want that house because I knew I could get the cheaper house and make changes for less than what the more expensive house cost. Plus I could pick whatever colors, materials and appliances I wanted. Am I crazy or does anybody else think that way?
It just seems to me that at best you will only get back what you paid. I think Realtors pressure you to improve your house because they think it will make the house sell quicker, less work for them. (I think selling your house more quickly can be very valuable but it still doesn’t mean you’ll get back what you paid for improvements).
Jesse: Time (and effort) *is* money, but not your hourly wage because of the reasons you mention. It’s a valid way to make decisions (cost/benefit analysis, etc.) whether to do something yourself or to outsource, but you have to figure the “value of time and effort” correctly. It’s not your hourly wage or your salary divided by how many hours you contribute to your job. That result almost will always be too high.
“Assuming you do it correctly the first time.
Just how much of a percentage is saved by doing it yourself is going to vary from project to project, of course, but it’s probably at least 30% in most cases.”
Thats being conservative. I would be more inclined to guess its closer to at least 50% on most things. I really get sick of the old cliche “Time is money” because its not true. Its a fallacy to think “Well I make $40 an hour so if I pay someone $20 an hour, I am saving money by my time.” That would only be true if the time you are paying someone to work is time you would otherwise be earning money.
That doesn’t include experience, the satisfaction of doing it yourself, and knowing it is done right (or at least what is right/wrong with it).
Along the lines of what your dad said – we had to price “limits” when we were looking: one for houses that were move-in ready and ones that would “require” upgrades (everyone will have different requirements, some more necessary than others). We were obviously willing to spend more money on a move-in ready house, and if we walked into a place that would require updating a bathroom or kitchen, finishing a basement to get the space we needed, etc., the money we’d be spending was subtracted from our best-case budget to get a figure we wanted to pay. If the asking price was close, we’d consider it. If the asking price was completely out of line, we’d move on. So I guess that’s where maintenance and aging of properties come into play.
Regarding figuring out what the neighbor’s homes look like – open houses are good, as are online listings of houses for sale and the like. It also doesn’t hurt to make friends with your neighbors so you can scope out your place. Ultimately, though, you have to find a balance between living comfortably in the home while it’s yours and being able to recoup as much as you can when you sell. The level of upgrades (the mid-range kitchen vs. the high-end kitchen, etc.) matter, as do the style of the upgrades. You might love a kitchen with butcher block counters, but many people will see it as unhygienic and/or “woodsy”, etc. and view it as something they’d immediately have to change, which makes the house “worth” less in their eyes.
And regarding selling quickly – Tom is dead on. A simple coat of paint can make a *huge* difference. Other factors to consider: Will you be competing with newer properties, and if so, will you need to make updates to compete? Styles change in 8 years so while a house may be well-maintained, it might also appear dated. Are all your bookshelves and closets at least half empty? Buyers want to make sure there’s plenty of storage, especially in attached housing. If it looks like you have room to grow, they’ll think they will to. And when you’re removing things, don’t box them up and stick them in the garage – move them to a storage unit or a friend’s basement or something. Also thin out kitchen cabinets and drawers if you can, and anywhere else where you have “attached” storage (bathroom drawers, etc.) – it’s nosy, but people will go through them. Replacing the carpet and refinishing the floors are a good idea as well considering the age of the unit. And clean like you’ve never cleaned before – hire someone if necessary. Ultimately, though, the asking price will be the biggest help or hindrance to a quick sale. This is where a realtor or agent can be invaluable – they can looking at other sales in the area, other properties on the market, etc. and advise you on an appropriate listing price.
@Justin, You’re absolutely correct. The Cost vs. Value table does assume that you’re paying full price for labor, so there’s bound to be some percentage that you’d be saving / recouping by doing it yourself.
Assuming you do it correctly the first time.
Just how much of a percentage is saved by doing it yourself is going to vary from project to project, of course, but it’s probably at least 30% in most cases.
You are forgetting the name of the show – Sweat Equity. In the link you provided, you are paying for labor, which can easily make up half the cost of a project. By doing the work yourself you will see ROR break through the 100% barrier. Its actually a clever name for a show when you think about it.
Here’s what My Father the Realtor said when I posed my Bride’s question to him:
The site I linked to in the first place also has some things to say on the subject.
David Crook in the Wall Street Journals “Complete Real Estate Investing Guidebook” has some things to say about home improvement as an investment. A lot of the hype it gets in the media is just to sell you on something you don’t need. The media and the companies that profit from it turn remodeling into a “keeping up with the Jones’s” sort of thing.
from pg 14:
I wonder if individually these projects don’t result in a positive ROI, but maybe the cumulative effect of many different renovations does. In other words, can we apply “The sum is greater than the parts” to home renovation?
@Julie, thanks for the tip. Aside from the occasional Open House in the neighborhood, what kind of legwork could a person do?
@Bride, I honestly don’t know, but thanks for reminding us that other factors are involved. I’ll see if I can get an answer.
They don’t add in the small remodel projects like painting the house. It’s amazing what fresh coat of paint will do for resale.
I have a question for you guys. I live in a nice townhome in a really nice section of Memphis. I’m probably going to be moving soon (6 months). What improvements can I make (I’d hire professionals, not do it myself) that will help me get the most bang for my buck?
Nothing is in dire need of repair – home has been maintained well over the years. Air cond./furnace are less than 8 years old. Nothing needs to be repaired (not even a leaky faucet).
I’m thinking of replacing the outside fence (which is 20 years old), having the interior painted (which is 8 years old), having the upstairs carpet replaced (8 years old), downstairs wood floors refurnished. I don’t plan to go so far as putting in granite countertops or anything that extreme – frankly this place will sell quickly without it. But are these the best improvements to make for the buck? Thanks.
Here’s a question for your dad and other great minds, though: say we spend $5K on the bathroom remodel, so we “get back” $4500…over what? Over our home purchase price plus basic appreciation?
If that’s the case, if we sell our house after 10 years, without a remodeled bathroom, the price we paid was for a 26-year-old bathroom but we’d be selling a 36-year-old bathroom. Isn’t there a “penalty” inherent in extremely dated brass-and-glass shower doors, old fixtures, and those one-piece molded shell-shaped sink-counters? I think that’s where you get the “2 back for every 1” math (particularly on bathrooms and kitchens, because plumbing and appliances degrade), because the sell price is affected by *not* remodeling as well.
If the improvements that you make to your house allow you to live more comfortably, then a prospective buyer will probably feel the same way.
It’s also important to do a little legwork in your specific neighborhood to avoid over- or under-improving. If you’re in an older neighborhood with homes that haven’t seen significant updates in a while, you’re not going to recoup the cost of that new kitchen by any stretch of the imagination. Conversely, if you’re in a neighborhood catering to a higher-end clientele, putting laminate or Corian counters into a kitchen or bath instead of granite, quartz, concrete or one of the other higher-end materials will cost you more when you sell than any savings you’d see at the time of installation.