Home remodeling ROI: Costs vs. value
Will that remodel really add value to your home?
by Jami Barnett, Ph.D.
If you’re remodeling to sell your property for a higher price, you’ve got to think about the return on your investment, or ROI. According to The National Association of Realtors (NAR) and Remodeling Magazine’s Cost vs. Value report, most ROIs aren’t actually all that great. Only a few have a return of over 100 percent, meaning you won’t get all the money you spend on the improvement back when you sell your house.
When considering what adds the most value to a home, ask yourself the following questions
Will the renovation help your house sell faster?
Homeowners have been spending more money on remodeling in recent years, and that trend is expected to continue, according to the Leading Indicator of Remodeling Activity (LIRA) report from the Joint Center for Housing Studies.
As more sellers renovate their homes for the real estate market, you might need to upgrade your house to keep up. If you’re getting your house ready for the market, make sure to spend your money on remodels that will help it sell, not just things you like.
Your house might be great on the inside, but if the outside looks dated or neglected, fewer potential buyers will even schedule an appointment to see it. Get more buyers looking by sprucing up the outside.
The National Association of Realtors reports something as simple as signing up for a lawn care service with weed control and fertilizer can provide a 300 percent ROI, and 14 percent of Realtors who recommended a lawn care service reported it helped the house sell! So, not only do outdoor improvements offer a great ROI, they also help get you to closing faster.
Think about which areas of your home prospective buyers care about most when deciding where to invest your remodeling dollars. For instance, 80 percent of homebuyers said the kitchen was one of the most important spaces in their house.
Although total kitchen remodels usually have an ROI under 100 percent (65-80 percent depending on the source), they can seriously improve your chances of selling your house. A quarter of Realtors who recommended homeowners renovate their kitchen said the redo led to the house selling.
Consider whether your home renovation will appeal to a niche market.
Renovations designed for aging in place, energy efficiency and home automation are all gaining in popularity, according to the Joint Center for Housing Studies. Spend money on remodels that offer unique and popular home features, because many people move when their physical needs change or when they’re looking for newer technology. For example, if you’re redoing the bathroom, add features like a walk-in shower with a bench and handrails to appeal to buyers concerned with limited mobility. Or, you could add home automation features for buyers who want to control their thermostat or lights when they’re away.
How much will the remodel really cost?
It’s easy to find the average cost of a home remodeling project online or by calling contractors for quotes, so you might think it’s simple to estimate your ROI. But unexpected problems can lead to higher costs, while local trends and tax credits can create a bigger profit.
Consider these costs and credits before committing to a project or hiring a contractor.
You’ll need to obtain a permit for many major renovations (like building an addition) and for anything that requires plumbing or electrical work. If you hire a professional to do the job, they’ll probably include the permit cost in their fees. Make sure to ask if permit costs are included before signing a contract.
If you do the job yourself, you’ll need to obtain the permits yourself. Contact your city or county government to learn about required permits and costs in your area.
Whether you go the DIY route or hire a contractor, remodeling can significantly alter your daily routine and cause inconveniences. If you’re redoing the kitchen, expect to eat out more than normal during the project since your kitchen won’t be usable.
If you have a pet, you may end up needing to board them during the renovation. Contractors coming and going can cause pets a lot of anxiety, and there’s always the risk of a worker accidentally letting your pet out of the house.
Rebates and tax credits:
Many power companies offer rebates for installing new appliances or for switching from electric to gas. Getting these rebates can reduce the cost of your remodel, resulting in a higher ROI than you expected. Contact your power or gas company to learn about any special programs they have.
There are some state and federal tax credits for installing energy efficient appliances and features. These credits vary from year to year and by state. Contact a local tax professional or do some independent research before you decide on a project.
Before shelling out big bucks on a home renovation project, consider what's standard in your community. Talk to a real estate professional or contractor if you’re primarily concerned with whether a home renovation will add value to your house and help it sell more quickly. After all, different trends are popular in different places; a pool might be a valuable addition in Arizona but a poor investment in Minnesota.