Most people remodel their home tomake it better fit their needs and desires. They upgrade the kitchen,build a deck, or add a bathroom to make day-to-day living morepractical and enjoyable.
But remodeling can also play a rolein financial planning. The home is typically one of our biggestinvestments. While much of its value is controlled by location and thegeneral economy (things we can't easily change), some portion of ourhome's value is determined by its condition, size and the degree towhich its layout and decor are up-to-date.
Home Maintenance
From a straight financial standpoint, it makes sense to maintain thehome well. Taking care of small problems while they are still small caneliminate the need for most larger expensive repairs. Problems that areignored tend to foster additional problems. For example, a simple thinglike clogged gutters can lead to wet basement problems and even pestinfestations.
Remodeling as an Investment
Butwhat about big expenditures like remodeling a kitchen or creating amaster bedroom suite? Clearly such improvements can have a verypositive effect on lifestyle and comfort, but how do they fare asinvestments?
A number of national magazines publish detailedguides to the return on investment of various kinds of remodeling andhome improvement projects. Typically, they say something like theaverage bathroom remodel costs $4356 and adds about $5150 to the resalevalue of the home. That's an 18.2 percent return in a few weeks. Not abad investment, if only you could count on it being true.
Unfortunately, while such articles make good reading and promoteremodeling (something very popular with advertisers who sellhome-improvement products), they often reflect a theoretical set ofcircumstances that often fail to manifests themselves in the realworld. Consequently, you have to take the article numbers with a largegrain of salt.
From a strictly financial point of view,large remodeling projects don't often deliver an immediate positivereturn on investment. However, there are some circumstances where gainsare likely.
Generally, good rates of return are most likely incircumstances where the home is catching up with other homes in theneighborhood. If the house is among the lowest priced homes in theneighborhood, then a large investment may garner significant returns.
Consider Your Neighborhood
This is most likely to happen in a close-in, older neighborhood wherethe original houses were quite small. Over the years, as the value ofthe underlying land has risen, many of the homes have been added on toand remodeled extensively. Eventually, most of the homes have beenupgraded. Remodeling and enlarging the home to meet the new standard isusually a great investment.
Similarly, large scaleremodeling in an urban neighborhood that is rebounding can be a wisemove. Sometimes run-down homes are available at a very low cost. Somepeople make a career/hobby of buying such homes, gutting them,remodeling them, and reselling them for substantial returns.
If you home is in a neighborhood full of homes with four bedrooms andtwo baths and your home only has one bath, investing in a second bathis a good idea: Even a third bath might earn a good return. But addinga fourth bath in such a neighborhood is likely to add very little tothe value of the house.
A better overall way to look at thefinancial returns of remodeling is to look at what you're getting foryour net costs. For example, consider a major kitchen remodelingproject that costs $40,000, but that actually adds $30,000 to the valueof the home. In essence you are getting your fancy new kitchen for netcosts of only $10,000. The question to ask yourself is "Does the newkitchen add enough enjoyment and practicality to my family's dailyliving to justify net costs of $10,000?" If the answer is yes, startremodeling!
Sometimes a fire or major repair requires you toredo part of the home. In that case you might be comparing the pros andcons of just replacing what was there with substantially upgrading thespaces to meet modern standards of looks and function.
Home Restoration
Simply replacing what was there, might restore the value that was lost,but is unlikely to add new value to the home. On the other hand, amajor upgrade will almost certainly add new value. To make thedecision, take the net costs of the upgrade and deduct the costs of thesimple replacement (the minimum costs you know you have to incur.) Youcan also deduct any insurance money that may be involved. When you addit all up, it almost always makes sense to go with an upgrade.
Real Estate Agents
In order to make good decisions in these matters, it is important touse real numbers about the extent to which various projects might addto resale value. Fortunately, every neighborhood has one or moreexperts who will happily share their advice for free. Who is this localbenefactor? Your local real estate agent.
Choose an agentthat specializes in a particular neighborhood and has years ofexperience. These agents spend their days talking to buyers and seeingtheir reactions to various houses and the improvements that have beenmade to them. They have watched people go through the decision makingprocess that determines the offer price. These agents have theinformation you want.
Best of all, most real estate agentsseek opportunities to strengthen relationships with potential clientslike yourself. For them, talking about the projects you envision andthe likely financial outcomes, is a good way to show you howknowledgeable they are in their field.
With the help of anexperienced local real estate agent, you can make sound decisions aboutremodeling as an investment. Unlike stocks and bonds, this is oneinvestment that you and your family get to enjoy every day!
