Investing News

Home Improvements with the Best ROI

Reviewed by Doretha ClemonFact checked by Michael Rosenston

Remodeling areas of a single-family house is an excellent way for homeowners to add increased functionality and beauty to a property. Plus, it can often provide a great return on investment down the line. A significant portion of the cost can be recouped from future owners in the form of increased property values if you choose the right project to enhance your living space.

Key Takeaways

  • Remodeling can boost the return on investment (ROI) of a house.
  • Electric HVAC conversions, garage door replacements, manufactured stone veneers, steel entry door replacements tend to generate the highest ROIs. 
  • Remodeling projects must generally fix a design or structural flaw to earn back the cost of construction.
  • The cost of renovating rental properties can be recouped during a sale but also with the increased rental rates that can be commanded by updated homes. 
  • Home equity loans are one way to finance renovation projects, allowing for interest-only payments until the property is sold and the costs are recouped. 

What to Consider Before Renovating 

The return on investment (ROI) of any given renovation project is a function of local market characteristics, the condition of the residential real estate market when the property is sold, and the quality of the work performed.

Certain projects have historically and on average shown the greatest ROI regardless of the property’s location or the state of the residential property market. They include electric HVAC conversions, garage door replacements, manufactured stone veneers, steel entry door replacements.

Important

Bigger renovations aren’t always better because spending more doesn’t always ensure greater value creation.

It’s unlikely that a homeowner will earn back more than the cost of construction unless the remodeling project is designed to fix a structural issue or a design flaw. Homeowners should consider the tastes of prospective purchasers when deciding which projects to pursue if cost recovery is as important a consideration as increased enjoyment from enhancing the property.

But homeowners should be careful about which projects they choose to complete because the potential value gains can only be realized to the extent that buyers are willing to pay for the renovations. And investors must be certain that any additions will fit into the existing space before the value of renovations can even be considered. This is something that the best home design software can help with.

Note

The cost of improving your home can be recovered by investors who are remodeling rental properties not only at sale time but also through the increased rental rates commanded by updated residences. 

Consider Your Location

It’s essential to ensure that the improvements made are appropriate for the particular type of dwelling and the local property area. One mistake homeowners often make is improving their homes well above the average for neighboring houses.

Buyers are typically attracted to particular neighborhoods because of the services located nearby and because houses in that area are selling within that buyer’s price range. A house improved well above others nearby may still receive the same level of interest compared to others being marketed, but it’s unlikely that it will command a premium well above average simply because of the extra improvements.

How the Government Can Help

Mortgage interest is tax-deductible so Uncle Sam may offer a discount of sorts on home improvements, making the cost of construction less burdensome for property owners. However, taking a new mortgage is not going to be appealing for many homeowners.

Less risk-aversive property owners who have accumulated adequate equity in their homes can use financial instruments such as a cash-out refinance or a home equity loan to finance their construction projects. The interest on a home equity loan can be tax deductible, but only if the improvements are substantial and meet the IRS’s requirements. Interest only options may allow you to delay paying the principal until you have the home sale proceeds in-hand, potentially reducing the up-front financial burden.

Important

IRS rules apply to the mortgage interest tax deduction. You can only deduct interest on the first $750,000 of mortgage debt. For home equity loans, the proceeds of the loan must be used to “buy, build, or substantially improve” your home.

Project Returns on Investment

The ultimate reason to take on any home remodeling project as an owner-occupant is the enjoyment you’ll receive from living in an updated home. Several sources offer insight into expected payback on specific projects for those who are hoping to also profit from remodeling.

Remodeling magazine publishes an annual “Cost vs. Value” report that compares the cost of common remodeling projects and shows the payback that homeowners can expect. These payback estimates are based on the residential real estate market fundamentals in place at the time, as well as the average cost of construction.

Table 1 contains national average estimates but homeowners can find more specific information at Remodeling Online, offering the same estimates for different geographic areas of the U.S. These average payback ranges for the most common remodeling projects can give prospective sellers a broad indication of which projects have the greatest probability of returning a bulk of the project cost at the time of sale.

Differentials in average recoveries are explained by the scope and quality of the work performed. Smaller, less useful projects are on the lower end of the range.

Renovation/Remodel 2023 National Average Cost Recovery
Wood Deck Addition 50.2%
Siding Replacement (Vinyl) 94.7%
Minor Kitchen Remodel 85.7%
Window Replacement 68.5%
Bathroom Remodel 66.7%
Major Kitchen Remodel  41.8%
Roofing Replacement 48.9%
Garage Door Replacement 102.7%
Entry Door Replacement (Steel) 100.9%
Primary Suite Addition 30.0%
HVAC Conversion (Electrification) 103.5%
Manufactured Stone Veneer 102.3%

Source: Remodeling Online

Improvements such manufactured stone veneers, electric HVAC conversions, steel door replacements, and garage door replacements had ROIs over 100%. Of course everyone’s ROI will vary and be unique to their specific home. Differences in regional markets, home size and features, personal situations, and much more will cause these variations.

What’s the Difference Between Renovating and Remodeling?

The terms “renovating” and “remodeling” are often used interchangeably, but Home Depot says they’re quite different. Renovation is the process of bringing a room or dwelling in poor or iffy condition up to good condition. It changes the quality of the room rather than the room itself. Remodeling is the process of making major structural changes.

How Much Do Americans Spend on Home Renovations?

The Joint Center for Housing Studies of Harvard University puts the figure at more than $500 billion a year. The spending trend is toward creating healthy and energy-efficient homes.

Will I Need Legal Permits to Make Renovations to a Home I Own?

In some cases, yes. The deciding factor is typically the safety of any changes you’re making. Structural, roof, plumbing, and electrical changes often require permits from your local government. Your contractor should be able to take care of this paperwork for you.

Considering renovations to personalize your home or boost property value? Check out our guide—Owning It: Investing In Your Home—to learn more about how to plan and pay for your project. 

The Bottom Line

Homeowners should consider the value they’ll receive from any remodeling project over any cost recovery that might be available from a sale. But they should research local real estate guides to determine which projects are most likely to pay for themselves when contemplating two equally useful changes.

Remember that bigger is not always better and spending more does not always ensure a greater degree of value creation. Home prices will always reflect the tastes of local property buyers and the amounts that those buyers are willing to pay in a particular neighborhood or subdivision.

Read the original article on Investopedia.

Articles You May Like

The Top 3 Healthcare Stocks to Buy in April 2024
Abandon the AI Bandwagon? 3 Stocks Flashing Sell Signals
Crypto Chaos or Crypto Cash Cow? Why Marathon Digital Is a Must-Buy in 2024.
7 Dividend Stocks to Hold Onto During the Current Market Turbulence
Investing in the Blockchain Boom