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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.:

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.