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Remodelling Your Home: Good Investment?

21 July 2006

Is renovating your home a good investment? It’s often touted as one. In fact, many lending companies will try to sell you on a home equity line using this as a rationalization: sure, you’re borrowing money on the house – but you’re making it worth more! So in the end, you’re actually MAKING money by spending it!

Forbes has recently examined this idea and come away with the conclusion that only bathroom renovations and siding replacement actually added value to the house on average:

Those numbers can be much higher — and also dramatically lower. In the western U.S., that bathroom renovation can bring in 112 percent of the original investment, according to the study. But around the country, a home owner will only get back about 74 percent, on average, of the cost of a new home office.

And just because you spend more doesn’t mean you will get back a higher percentage of your money later. For an upscale kitchen makeover, which involves installing custom cherry cabinets and other luxurious amenities, the average recouped value is lower (about 85 percent) than for a minor kitchen remodeling project (98.5 percent), which is much less extensive and expensive.

And if you’re looking to get your money back when you sell, it’s a good idea to avoid the unusual.

“Kitchens generally tend to recoup their cost, and bathrooms too,” says Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate. “Those are widely appealing to the marketplace, and they tend to be more standard in form. Things that are very idiosyncratic and are customized to the home owners’ individual tastes … don’t appeal to a wider audience.”

There are a couple of other reasons to be cautious:

1) Are you actually planning on selling the house soon? If not, it’s hard to rationalize your renovations as an “investment.” It’s not going to add value that you’re ever going to see, because over time the renovations will become less new, and less valuable – to the point that if you wait too long, the new owner may want to renovate themselves to keep up with the current styles.

2) What about the interest you’re paying on the new debt you’ve just tacked onto your home loan? That’s a cost you have to factor in as well.

3) Are you really doing this as an investment, or just because you want to? Flimsy rationalizations for spending are just about the worst thing people can do to themselves. If you’ve got the money to do it and want to do it for yourself, fine. But don’t try to justify renovating when you shouldn’t on the grounds that it’s an “investment.” Real renovation investments involve cheap improvements to the house that make it look good, right before a sale. You generally try to spend as little as possible to make the house look a lot better than it actually is. Most people aren’t trying to do that – they want a new office or gameroom or a better looking kitchen. If that’s the case, don’t borrow on your house to do it. Wait until you’ve saved up the money, and then spend it. And don’t spend beyond what you can afford.

Discuss this and other financial topics in the Free The Drones forums.

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