Home Reno: How to Get the Best Return on Investment
A spa-like bathroom? An outdoor deck? A luxury kitchen with updated cabinets and top-of-the-line appliances? If you’re a homeowner thinking of doing some remodeling, these may sound like appealing options. However, before you call the contractor, you’ll want to consider what upgrades make the most sense for building equity if you decide to sell or refinance. In this article, we’ll look at the best renovations for adding value to your home – and getting the most return on investment – so you can plan your next project with confidence.
What Is Return on Investment?
Simply put, return on investment, or ROI, is a metric used to evaluate how profitable an investment is. The best home improvement projects are ones that return close to 100% of your original investment. What type of renovations can provide a significant return? Updating old features, increasing the square footage, and improving functionality can boost your home’s appraised value. That said, most home improvements won’t give you a 100% return on investment. House flippers on TV make it seem like making money with home renovations is easy, but things are a bit more complicated in real life.
Several factors affect the financial return on your home renovation investment, including:
- Location – Your expected ROI can vary based on the region where you live, your local real estate market, and even your neighborhood. When considering updates, you’ll want to look at neighboring houses and their features. Do your planned improvements fit with the neighborhood?
- Timing – When you plan to sell can also impact your ROI. Is it a buyer’s or seller’s market? In a buyer’s market, you might not recoup your investment. But in a seller’s market, in which buyers are competing against each other for homes, you might meet or exceed a 100% return on your investment.
- Type of Project – Not all remodeling projects will add value to a house. It’s a good idea to consult a local real estate agent if you’re planning to sell to make sure you can get the most return on your investment before starting a major remodel.
A high ROI for home improvement projects means recouping a significant amount of the renovation costs through selling the house, increasing its equity, or through savings (such as reduced energy costs). Calculating ROI can be tricky as there are a lot of variables to consider. Getting a home appraisal is really the only way to determine the fair market value of your home – and how renovation might improve it. Luckily, experts have crunched the numbers and have determined the best – and worst – home renovations for return on investment. We’ll get to those in a moment after examining short-term value and long-term value.
Short-Term vs. Long-Term Value
Adding functional space and square footage – such as a room or finishing a basement – are projects that add long-term value. Similarly, adding a bathroom is something most homebuyers will appreciate and it’s a renovation that will stand the test of time.
On the other hand, giving your kitchen a makeover with the latest design trend may boost your home’s value only for a few years – until buyers embrace a new style.
If you’re planning to sell or refinance in the near future, going with projects that add short-term value can make sense. These might include:
- Adding a Deck, Patio, or Porch – An attractive exterior structure for relaxing or entertaining is something many prospective homebuyers want, and it adds to the perceived value of your home. Average ROI: 65% to 90%
- Remodeling a Bathroom – Real estate agents will tell you that kitchens and bathrooms sell homes. Updating showers, tubs, toilets, and vanities can give your bathroom a fresh new look that buyers will appreciate. Want to do more? You can go a step further and completely redo the whole room from floor to ceiling. This can be especially enticing to buyers, particularly if you upgrade the master bath. Average ROI: 90% to 100%
- Remodeling a Kitchen – Experts don’t always agree on how to approach this one. Some recommend minor revisions – updating appliances, refacing cabinets, installing new sinks and flooring — while others advocate full-scale makeovers that change the size and layout of the room and include adding new cabinets and counter space. A minor renovation involves mainly cosmetic changes and will cost substantially less than a major renovation. You’ll want to consider your options before making a decision. Average ROI: 50% to 75%
Other remodeling choices can provide long-lasting value. These include:
- Adding a Bedroom – Because appraisers look at square footage, adding a bedroom will have more impact on your home’s value than converting an existing room for that purpose. If you increase the square footage, the value of your home will also go up. How much it increases can depend on several factors including whether you’re in an urban or rural area, your neighborhood, and the current market. Average ROI: 50%
- Adding a Bathroom – This can be expensive, so research other houses in your neighborhood before deciding how much an extra bath and bedroom can add to your home’s value. If most homes in your area are three-bedroom two-bath houses, and your home has two bedrooms and one bath, an addition could boost the value of your home. On the other hand, overbuilding for the neighborhood might not pay off. Average ROI: 55%
- Finishing a Basement – A finished basement can be attractive to buyers and add more livable square footage to your home. With a little drywall, flooring, and paint, you can turn the basement into a selling point and increase your home’s value. Average ROI: 70%
Don’t Forget Curb Appeal
The outside of your house is the first thing buyers see and making a few moderately priced renovations could boost your home’s value. Here are a few to consider:
- Updating the Exterior – Giving your house a fresh coat of paint can make your home more marketable and attractive to prospective buyers at a relatively minor cost. Faded or weathered siding can detract from your home’s curb appeal and should be replaced. New vinyl siding will cost a bit less than manufactured stone veneer, but both will improve your home’s appearance and boost its value. Average ROI: 50% to 95%
- Replacing Doors – An old or dull-looking garage door doesn’t do your house any favors. Updating to a high-end garage door not only makes your house look safer and more appealing but also adds to the value of the property. Similarly, a new front door can make your home look more inviting at a modest cost. Average ROI: 90% to 95%
- Updating the Landscaping – Landscaping can give you the most bang for your remodeling buck. It’s also a low-cost way to make a good first impression on a potential buyer. Experts recommend updating both the front and backyard with a landscaping design that’s simple and clean and doesn’t look too work-intensive to maintain. Average ROI: 100%
It’s Not Always About ROI
While this article addresses focuses on the economic value of home renovations, sometimes these type of projects aren’t always about the ROI. If you plan to stay in your home for a long period of time, then perhaps the value you will receive versus the amount you spend is not as important as your personal preferences. However, if you would like a good idea of the type of ROI you will get from a home renovation project, Remodeling Magazine does a study each year that calculates the average cost versus value of 22 different remodeling projects at both a national and regional level. The 2022 report can be found here.
How to Pay for Home Renovations
As a homeowner, you have a few options when it comes to paying for upgrades and renovations:
- HELOC – A home equity line of credit is a revolving line of credit that lets you tap into your home’s equity to borrow money when you need it up to your limit. HELOCs tend to have lower interest rates than unsecured loans.
- Home Equity Loan – This is an installment loan with closing costs that provides you funds in one lump sum. This can be a good choice if you know how much you need to borrow.
- Cash-Out Refinance – With a cash-out refinance, your new mortgage is for more than what you owe on your home. The extra amount goes to you in cash. If you can get a low interest rate, this can be a good source of low-cost funds.
- Construction or Renovation Mortgage – These type of mortgages work particularly well for bigger renovation or remodeling projects. The advantage of a construction or renovation mortgage is that the future value of your home (what it is worth once the project is completed) can be used in determining the amount of equity in your home and give you more borrowing power for your project.
Renovating your home can improve your quality of life as well as add value to one of your biggest assets. The type of renovations and upgrades you choose depends on your personal goals and current life situation. If you have questions or need assistance with financing, reach out to ENB and we can help you determine your best renovation financing option.