The Good, the Bad, and the Ugly
Spending on home remodeling projects in the United States hit $215 billion in 2005. (According to the CIA World Factbook the GDP of the country of Argentina was $210 billion at the official exchange rate in 2006.) Home remodeling costs account for approximately 40% of all residential construction spending and makes up nearly 2% of the U.S. economy. That’s a serious amount of coin.
Numbers don’t lie; Americans love investing in their homes, and for good reason. Usually it’s a win-win situation. Not only are homeowners improving their residence, they are increasing the equity – the difference between the value and what is owed – on their home.
Yet, there are certain improvements homeowners can make which give a greater return on investment (ROI) than others. Sometimes narrowing down the good, the bad and the ugly can make all the difference in that showdown between sound investments with outstanding ROI’s, and feelings of skipping through a minefield with your wallet open to the breeze.
Typically a smart investment can net returns of 80%-90% on the dollar within the first two years. Of course, by being in the home longer, homeowners give the real estate market time to grow. This adds leverage to the remodeling investment as property values increase. The process, known as compounding, means that homeowners may even make money on their remodel projects the longer they live in the residence.
Without a doubt, the number one improvement a homeowner can make in terms of ROI are improvements to the kitchen or bath. But, this, like anything else has its limits.
Remodeling Magazine puts “minor kitchen remodels” at an 88% ROI in one year with the cost of improvement at $8,655. Conversely, in the 2006 Cost vs. Value Report, “major kitchen remodels” cost $107,973 and only offered a 73.9% ROI. Spending more doesn’t necessarily mean a higher return on your investment.
Green, healthy lawns, fresh exterior paint or siding, landscaping and clean windows all offer a high ROI at a relatively low investment.
Pools, decks, wine cellars, saunas, home theatres and the like are generally defined as “lifestyle projects” and considered an unhealthy investment in terms of ROI. Think of it this way, your dream wine cellar or sauna – that room or respite you have wanted all your life and, now that the kids have moved out, you can finally have – might be considered nothing more than wasted square footage to the family of six – with two crying, brand new twin babies – looking to buy your home.
If you’re planning on staying in your home for quite some time then, by all means, invest in that home theatre system if you want one. You’ve earned it. But, if your goal is to “flip” your property or, at the very least, sell it in three to five years, then be wary of where you spend your dollar.
Decks offer about a 55% return on investment and pools, often considered a liability more than anything else, can dip to as low as a paltry 5-15% ROI. Ouch!
The one thing you never want to do in a home remodel is sail past the comparable houses in your neighborhood. It does you absolutely no good whatsoever to have a $750,000 home in a neighborhood where the next house lists at $420,000. Prospective buyers looking in the $420k range can’t afford your residence and those looking to purchase a $750k home want to live around other $750k to $1 million dollar properties.
Talk to your neighbors to see what they have upgraded in their home. Discuss your ideas with your realtor if you are considering a bold and costly addition or upgrade. Make sure and define what the market will bear in terms of a sound investment which produces a better than average ROI. If you don’t do your homework, you could be living in your home for a very long time before you can recoup your investment. Or worse, sell your property at a loss.
Home improvements are like anything else in life; know where the minefields are, never skip through them and, if you have to plant them, be ready to bear the consequences.