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Investing in Your Home and Hearth-Part
One
Home Improvements and Return on
Investment
As a homeowner, you have already made one of
the most important investments that you can make for your family’s future. But
it shouldn’t stop there. Owning a home is not a static thing—as you no doubt
know. If you make smart choices about the improvements you do to your home, you
can see a very nice R.O.I when you decide to put it on the market.
What is R.O.I.?
R.O.I. stands for Return On Investment. Successful bankers and businesspeople
use it as a key concept in any investment process. The concept is to get the
maximum return for the minimum investment in your home—not just in terms of
money, but also in terms of the time and effort involved in remodeling.
R.O.I vs. Lifestyle
Improvements
It is important to draw a distinction here between Lifestyle improvements and
R.O.I improvements.
• Lifestyle
improvements are projects important to you and your family but not
necessarily to a potential homebuyer. Pools, tennis courts, even a home office
may be just what you want for your home, but they generally do not offer a good
return on your investment in the real estate market because the increase in the
resale value of your home is significantly less than the cost.
• R.O.I.
improvements are designed to make your home more attractive to buyers so you
can sell it for a higher price. Since you are making ROI improvements to make
money, it is important to look at the bottom line—the return on your investment.
Adding a bedroom or bathroom, upgrading old or damaged windows, and improving
the appearance of your fireplace are generally good investments that will pay
off when you decide to sell your home.
The distinction between Lifestyle and R.O.I. improvements offers a
good way to think about which projects are right for you and your home. Don’t
think of Lifestyle improvements as bad and R.O.I. improvements as good—if you
really want to make a change to your house, it might be worth doing even if the
return isn’t as good as other projects.
Is It Worth It?
Many people ask if it is worthwhile to invest time and money in home
improvements. This question does not have a simple yes or no answer. A lot
depends on the following factors:
• Your Plans. If you are planning
to sell your home in the next 1-2 years, some home improvement projects are not
for you. This is because some projects will not give you a good return on your
investment. You may want to concentrate on basic maintenance and quick,
inexpensive improvements that are attractive to buyers.
If you are planning to live in your house for several years, then larger
projects such as adding a second story, a deck, or an upscale kitchen or bath
become more attractive because you and your family can enjoy them and because
your home is continuing to appreciate in value as you live there. This
appreciation offsets much of the renovation cost.
• Your neighborhood. Always
consider your neighborhood when planning a home improvement project. For
example, if most of the houses in your neighborhood are 2/1 (two bedroom, one
bath), adding two bedrooms and a bath to your house may not give you the same
return you would get in a neighborhood of larger houses. This is called
“overbuilding.” If you overbuild for your neighborhood, the smaller (and less
expensive) houses around you will lower the value of your own house—no matter
how nice it is. Instead of adding on to your house, you may want to consider
working on the existing features of your home such as improving the
appearance of an ugly fireplace.
• The Project. Really, it all
boils down to this. Is the specific project you are planning worth the
investment? To calculate the R.O.I. for a project, take the increased resale
value of your home after the improvement and divide that number by the cost of
the project.
This chart shows some common home improvements
and their average R.O.I.:
|
Project |
Cost |
Average
R.O.I |
|
Remodel bathroom |
$7,500 to $8,500 |
69% to 77% |
|
Painting |
$700 |
200% plus |
|
Minor kitchen remodel (new appliances,
surfaces) |
$2,000 to $8,500 |
80% to 102% |
|
Major kitchen upgrade (new appliances,
cabinets, island) |
$9,000 to $25,000 |
70% to 90% |
|
Finish basement |
$3,000 to $7,000 |
15% to 25% |
|
Add a new fireplace |
$3,000 to $8,000 |
60% to 90% |
|
Update fireplace
(replace/rebuild) |
$3,000 to $8,000 |
50% to 80% |
|
Update fireplace (custom fireplace paint
kit) |
$200 |
150% to 200% |
|
Add a bathroom |
$5,000 to $12,000 |
92% |
|
Build a pool |
$10,000 and up |
39% to 44% |
|
Add insulation |
$1,750 |
65% |
You can find additional remodeling information broken down geographically in
this Remodeling
Online article.
In the next article, we will explore several home
improvement projects that offer good returns on your investment.
Click here to read part two of Investing in Your Home and
Hearth.
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