ROI on Home Improvements

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When people look into home improvement projects, the return on investment(ROI)is often a major concern. Homeowners want to make sure that they are getting the biggest increase in home value for the amount spent on their upgrades and renovations. To help them determine what projects offer the most bang for their home improvement bucks, people often turn to lists like Remodeling Magazine's "Cost versus Value Report"

As you wait for the 2013-2014 edition, however, know that this sort of report doesn't tell the whole story. Just picking projects at the top of the ROI list neglects some important concerns:

  • Project scale
  • Local market concerns
  • Your lifestyle
  • Your timeframe
  • Deferred maintenance

Examining these other factors may help you choose a more appropriate project for your needs and your finances.

Project Scale

Many of the projects that provide the highest ROI are smaller-scale changes – for example, a steel entry door. However, does a 200 percent ROI on a project costing $400 really make much of a splash? You're going through the trouble of buying, transporting and installing a door, and at the end of the day you've added $800 to your home's value. On the other hand, a large project like a $30,000 room addition with a 120 percent ROI increases your home equity by $36,000.

Local Market Conditions

If Remodeling Magazine says decks are lousy investments, it doesn't necessarily mean you should avoid them. If the homes in your neighborhood all have spectacular ocean views, buyers will want decks overlooking that natural beauty – if in doubt, ask a local real estate pro or appraiser. You'll also want to be cognizant of other local conditions like zoning issues and CC and Rs (or that six-car garage of your dreams could get you into hot water). Finally, experts caution against under or over-improving your home for your neighborhood. You won't get value for a home theatre and park-like landscaping in a neighborhood of small tract homes with dirt lots. And if everyone else has three bedrooms and two baths, a five bedroom, two bath home won't be functional or popular with buyers.

Your Lifestyle

If you fixate on remodeling to increase your property's selling price, you could forget the fact that you're not just dealing with a building – it's your home. So what if the experts say that a swimming pool won't pay for itself -- if you have three grandchildren on the swim team and poolside barbecues bring you joy, and you're going to live in your home at least five years (see below), and you can afford to make the upgrade -- bring on the Weber and water wings!

Time Frame

If your chief motivation for renovation is the addition of home value, you'll want to avoid making big changes several years before selling. What's popular now changes about every five years--contractors call this "stylistic depreciation"--so consider how much longer you plan to stay in the home before you make major alterations. Otherwise, your expensive work could end up out of fashion and provide little, if any, additional equity.

Deferred Maintenance

The expected ROI for a "mid-range kitchen renovation" might be only about 80 percent in your part of the country, and you plan to sell this year. You should skip the upgrade, right? Not necessarily. If your kitchen offers the "charms" of worn linoleum floor, harvest gold fridge, avocado Formica counters, sagging cabinetry and tiny, battered sink, you probably can't afford not to upgrade. Bringing your kitchen up to snuff might only add 80 percent of its cost to your home's value, but leaving it alone could cause your house to sell for less than its appraised value, or make buyers turn up their noses altogether.

Even if the ROI on your planned home improvement doesn't exceed 100 percent(the point at which the cost of improvement is offset by the added home value), the upgrade might make sense. It may enhance your lifestyle enough (like the swimming pool in the example above) to be worth doing. Or it might pay for itself in decreased marketing time when you sell. How much does a fast sale save you? Experts say, a lot! Money-zine.com says that an unsold home has a carrying cost of close to one percent of its value each month.

Using the Census Bureau's American Housing Survey, Money-zine found that it cost $1,169 per month to own an average home costing $165,344 -- about 8.5 percent of its value per year, or 0.7 percent each month. When evaluating a home improvement’s ROI, overlooking this fact could cost you.

Need More Help?

If you need professional help with your project, LendingTree Home Pros can help.

The good news is that LendingTree Home Pros maintains a directory of home service professionals and can match you with a home pro in your area. All the home pros listed in the LendingTree Home Pros directory are properly licensed and insured and are backed by a $10,000 money-back guarantee!

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