Home Renovations: Do They Pay Off?
Home improvements are not an investment. Even at the real estate market’s peak, most remodeling projects didn’t pay for themselves. You should view home renovations as consumption spending – not investing – and ideally you should pay cash for consumption.
This is not to say you should never upgrade your house. Roofs, appliances, flooring and other surfaces wear out over time. You might want to improve an inefficient layout or tear out a previous owner’s bad taste. It might also be worthwhile to remodel rather than sell and buy another home, especially if you like the neighbourhood. Selling expenses, moving costs and real estate commissions can really eat into your house’s value.
Most home renovation projects are unlikely to recoup more than two-thirds of their costs and most will return much less. Be careful about tapping into your home equity. It makes no sense to finance your project unless you plan to live in the house for many years.
If you do finance your upgrades, make sure they really will add some value.
- Beware of home renovations that make your house bigger or fancier than others in your neighbourhood.
- Be careful about adding in-ground pools. The cost, hassle and drowning risk for small children can really turn off potential buyers.
- Be a little more conservative in your choices rather than indulging your bold or wild personal taste. (I used to have a raised dance floor in my basement!)
Some less expensive possibilities for home renovations include:
- Refurbishing instead of buying new, e.g. refacing kitchen cabinets, refinishing hardwood and reglazing tubs and sinks.
- Re-think your rooms. Can an unused dining room become a home office?
- Spruce up your landscaping by trimming bushes and hedges and planting a few low maintenance flowers.
- Freshen up with paint, and
- Clean and declutter.
You will recoup the most of the cost of your project if you sell within a year of finishing the work. Home renovations start to get dated as soon as you finish them. Newer and trendier colours, styles and finishes are constantly being introduced. In other words, today’s stainless steel can be tomorrow’s harvest gold.
I mostly disagree with this opinion. On several the home renovation TV shows where owners invest a significant amount of money into renovations, the net sale price is much higher than the what the sale would have netted before the renovations + the cost of the renovations.
So not only do they recoup their investment, but they increase their profit margin by a lot. That said, some renovations are more likely to increase the value of your house than others, such as kitchens and bathrooms, but I wouldn’t rule out re-flooring. And it probably works best in high-density urban areas where the house market is INMHO completely retarded in the first place (e.g. Toronto, Vancouver)
(e.g. “Love it or list it” is probably the best example, but there are many many more with similar themes)
@Fred. TV shows are meant for your entertainment, just like the house flipper shows. I would question some of the projected prices. That said, I don’t mean to imply that home renos will never add value to your home – just that most of the time you will not recoup all that you paid out. Paying $30K for a new kitchen will not increase your house value by the same amount.
On all the “HGTV”-type of shows it seems like their additions to the home are nearly always removing clutter and a new coat of paint. Sometimes they add a decoration of some kind, or tastefully placed flowers to draw your eyes somewhere. Almost never do people start putting in hard wood floors, or knocking out walls etc.
@My University Money. If you’re selling your home, most of the time all you need is to clean and perhaps repaint assuming you’ve kept up with major maintenance. If your furnace or roof is 25 yrs old potential buyers are for sure going to want a big time reduction in the price. Otherwise I wouldn’t bother with a lot of upgrades because as people have their own taste.
Good post.
I think some improvements are an investment. Kitchens and bathrooms, if done well and properly, can really add value to your home. If you are planning to stay in your home for many years, well, that’s a different story – you don’t really care about adding value, you care about function and esthetics. I say this because you have to live somewhere – a house is a house – but you might as well enjoy it.
I’m not sure I agree with the statement of not using your LOC/HELOC for major home renovation projects.
HELOC for a few thousand, maybe not. But if you had to put on a new roof like we did, which was the price of a small car, not many people could do that with savings alone and even if they did, they would have nothing left afterwards. I think we today’s rates, as long as folks aren’t spending like crazy and cannot afford to pay off their LOC, then this is a perfect time to do home improvements. This cheap money is not going to last forever.
@My Own Advisor. Realtors say that upgrading kitchens and bathrooms will give you the most return, but you still won’t get 100% back on a sale.
I would use my HELOC on such a major reno. As you say it’s hard to save the thousands you need, but you have to use some discretion here and not use up the whole line just because you think you will recoup on a sale.
Great post and discussion. Keep up the good work.
Dear Fred:
i am a Realtor with eleven years of experience in Toronto. Let me tell you first my opinion about those TV Shows: They are just TV shows. In most of the cases they have nothing to do with the reality. I totally agree with the original article because in real estate 2 + 2 is NOT 4. Sellers use to think that if they spent, for example $10K in a new hardwood floor, they will get $10K more for the house. THAT WILL NEVER HAPPEN. May be they could get 2 or 3K extra and that’s it. The new floor will be only a good new attractive feature that will speed up the selling process. At the end of the day, the final price of a property will be determined by the willingness and flexibility of both parties. If you can get back 2/3 of your renovation expenses, you should be happy. In most of the cases, Math is NOT applicable in a residential transaction.
@Jorge Branca. Thanks for your comments. As a realtor I guess you would know the market better than I.
If I was buying a house now I would really want to check out the “new” renos advertised. A house near mine was listed as having brand new kitchen, bathrooms and flooring, but on inspection they were made with the cheapest materials possible and will look terrible in just a few years.
Hi Boomer:
I agree with you. As you can see, they are not lying but, in marketing the thuth has degrees and, in some cases, the reality maybe is not the same vision that YOU had in mind when your read their advertisement. You must go, see and then evaluate if fornYOU the value is OK or not. Sometimes paying a bit more for another house could be a better deal. But… As I said before, every case is UNIQUE not only because of the property but, particularly, because of the parties involved with their “needs” and “wants”.
I’ve seen crappy houses sold in just a week for $50K more than the asking price and beautiful homes sold in a month for $10 or $15K less.
Basically speaking… The “ice castle” of the market value built by the appraiser, it’s melted by emotions at the negotiation table.
A lot of those home improvement shows were filmed before the big housing meltdown, so when a house went up $20k after $5k in renovations, chances are the market was drifting higher and the price would have gone up some portion of that $20k anyways. Now, of course, it’s a different story.
@Money Beagle. I suspect you’re right.
Thanks for your comment.
Good post! I’d say that it can be an investment if the property you purchase was for an investment in the first place. That way you approach the problems from an investment perspective. From a personal property, our taste and emotion can get in the way of seeing the real added value.
Timing the renovations is a good thing too. If it’s 25 years old, it can be time to upgrade and therefore you get 2 things done: personal upgrade and renovation upgrade.
I also think there are items that are maintenance and others that are renovations. Replacing a furnace or a roof is maintenance. Redesigning a kitchen, adding heated floors and such are renovation/upgrades.
We did quite a fair bit on our house but we bought it with the intent to do so. Interestingly enough, it’s in line with our neighborhood since the houses are over 20 years and many renos/upgrades are happening so it stays in line with the area at least. As for recovering cost … I am not really focusing on that as opposed to making sure our decision aren’t a negative on the value (like a dance floor 🙂 ).
In the end, the value is what the next buyer is willing to pay.
Earlier this past summer, my wife and I renovated our basement.
We decided that we didn’t want to do any major structural changes to it, mainly plaster, paint, light fixtures and moldings on the ceiling. The biggest item we invested in was a full bathtub kit to remove the old, crummy one.
Prior to these renovations, our home would have sold for roughly $285,000 but after doing these renovations, we know our home could fetch well into the $310,000-$320,000 range if we want to pull the plug.
As Money Beagle, mentioned, it also helps when you’ve got a market to prop things up even further, but renovations can add value if done properly IMO.
The renovations weren’t substantial and only cost us about $3,000 at the end of the day. It’s amazing what a bit of paint, plaster and gutting out your basement of clutter can do to a home.
A couple years ago, my wife and I took advantage of the renovation tax credit to renovate our upstairs. We wanted to put a full bath tub kit, change the vanity, paint things up and add a new light fixture. It was nice to take advantage of the credit; if I’m not mistaken, the option wasn’t available to Canadians the year after.
Nice post!
TWC
As you always hear, you can expect at least 100% ROI for money spent on kitchens and bathrooms in a home, as long as you don’t get into ultra expensive custom work. You should never over-remodel, meaning ultra high end appliances on a modest home.
As people want to increase their living style so they do not have any problems for paying the money for quality home renovation works.If the renovation contractors will provide good quality work at the affordable price then more people will do their renovation work.
I think it really depends on the condition of the house and it’s also the matter of personal opinion. Renovation does have the potential to increase the value of a house, but it depends on the magnitude and quality of renovation.
Great post, Boomer. Thank you for sharing your tips.