Deciding Whether a Home Improvement Makes Financial Sense
Millions of homeowners have taken advantage of low mortgage and home equity loan interest rates to make home improvements or remodel their homes over the last several years. When they sell their homes, many of them are unable to recoup the money they put into the improvements. Not all home improvements are created equal, so how do you know which ones will pay you back the money you put into them?
Home improvement payback values vary widely by region and even by neighborhood. In general, expect to recoup less of your investment in a slow real estate market than you would in a hotter real estate market where houses are appreciating rapidly in value.
One of the most popular projects, finishing your basement, has one of the lowest rates of return. The average payback for finishing a basement is less than 50% of your costs, so if you spend $10,000, you can expect to increase the value of your home at resale by less than $5,000; the other $5,000 comes out of your pocket.
Kitchen remodeling and bathroom additions often pay back 75% to 90% or more of your costs. In-ground pools end up being notoriously bad investments, averaging a payback of less than 10%. Whirlpool baths, fireplaces, and decks don’t fare much better. Remember that what’s important to you may not be important to a potential buyer.
Improvements that potential buyers are most likely to be willing to pay for include:
Adding or remodeling a bathroom
Kitchen improvements
Adding a room
Landscaping
Adding a bedroom
Adding a garage
You can’t always make a decision about home improvements based solely on the financial aspects. You may need extra space for an expanding family or have a home improvement that just can’t wait, like a new roof. But if you’re planning a home improvement project that doesn’t have to be made, how do you decide if it makes financial sense?
Remember that when it comes time to sell your home, it’s never a good idea to have the biggest or most expensive house in the neighborhood, because it will be more difficult to sell if the asking price is higher than other homes. The same principal applies when remodeling. If you make your home significantly larger or more expensive than others in the neighborhood, your likelihood of recovering your costs declines.
So, think carefully before tapping the equity in your home to make improvements. If you plan to sell in the next five or so years, you may recover only a small percentage of the money you put into your home improvements. You could even end up owing more to the bank than you can get for your house when you sell it.
If you’re planning to sell and are considering making improvements in order to increase the selling price, do your homework first. Talk to experienced realtors, builders, and other industry professionals about whether you’re likely to make back the money you put into the improvements.