Owning a home is much more than having a shelter, it is managing a investments. A house or condo is often your greatest asset, so instead of just enjoying it, you have to worry about improving it all the time in the hopes that you can sell it for far more than you ever paid for it.
It’s as if the moment you bought your house, you started plotting to drastically change it – add or redo a bathroom, finish the basement or update the kitchen. Whenever you hesitate to consider the cost of these renovations, someone invariably tells you that it will increase the overall value of your home (because no one stays in a home for the duration – the average homeowner will only linger between eight and 13 years, on average, before moving again).
But How many will your renovation increase the value of your home? What will be the return on investment (ROI) of a renovated kitchen, bathroom or other project? Here’s how to figure that out.
A note on styling
Before we get into the numbers, one thing to consider here is personal taste. A home is a personal space and your ideal kitchen may not be someone else’s. A kitchen built to your idiosyncratic tastes may make you feel all warm and confused inside, but someone looking to buy your home might consider it a renovation that reduced the value of your home because they will have to spend extra money to remove it. If you’re thinking about future returns on your investment, cut back on customization and creativity and play it safer.
What is the return on investment?
In a sense, ROI is a simple equation: divide the return by the cost. If you spend US$20,000 ($27,764) on a kitchen remodel and sell the house for US$15,000 ($20,823) more, you just got a decent 75% return on investment. Congratulation! Yes, it’s true – the return on investment for renovations is almost always less than 100%, which means you’re not getting your money back. The average return on investment for home renovations is around 70% – one reason why many people lose money when trying to flip a house.
Still, a renovation can make your home easier to sell, sell faster, and improve your quality of life while you live there. The trick is to estimate your return on investment before deciding which renovations are worthwhile.
To understand this, you need to know what kind of return you can expect when you sell your home. A good place to start is Remodeling Magazine’s annual cost versus value report, which takes data on remodeling projects across the country and calculates the typical return on investment for different projects. You can research different projects specific to your region or view national averages. These numbers may not be 100% accurate for your project, but they give you a good idea of how much money different renovations bring in. For example, a mid-range kitchen renovation generates an average return on investment of 71%, while the return on investment for a major kitchen renovation is only around 53%. Using this data gives you a starting point to determine what the return on investment for your specific project might be.
One thing to consider is that data like this usually assumes that you are using a contractor for your project, and therefore includes labor costs. Sweat equity is “free” in monetary terms, so a kitchen remodel that costs someone else US$30,000 ($41,646) and earns them US$20,000 ($27,764) might only cost you US$15,000 ($20,823) because you’re not paying for the work; suddenly your return on investment is much higher. On the other hand, if you DIY your renovation, you risk not finishing it to professional standards and your return on investment could drop as a result.
You can never calculate the return on investment of a renovation with absolute certainty. Changes in the housing market and your design choices (as well as the desires and priorities of house hunters in your area) can change this calculation at any time. But starting with real numbers can at least help you make a series of educated guesses that will get you pretty close.