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  • Home renovations that yield a return: A simple formula and chart of ROIs

    Thursday, February 8, 2024   /   by Amy Brown

    Home renovations that yield a return: A simple formula and chart of ROIs

    The Spring buying season is approaching quickly and that means that it's time to get your home ready for sale. In order to get the highest return on your investment, there are certain projects that are worth the cost, and some that are not. 

    While kitchens and bathrooms are the generally thought of principle for the best investment, that is not always the case when evaluating cost vs. return.

    Let's take a look at what return you can expect from different types of renovations. It may not be as much as you think.

    The critical mistake when renovating a home is thinking that you will get all of your money back plus a profit. In general, home renovations only return 70% of your investment, not 100%+. Also, while you may be tempted to go with the cosmetic elements, it would actually be a much better strategy to improve the mechanics so that you don't get hit with repair concessions during due diligence which cut away at your profits.

    Also, a critical mistake is over remodeling for the return or remodeling for your personal taste. I have seen many homeowners put thousands of dollars into a bathroom renovation, for instance, only to have the feedback received from showings that buyers don't care for the geometric gold tile in the shower or that the crystal chandelier light fixtures are too much. 
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    What happens at that juncture is that buyers then factor the cost of their own remodel into their offer price, and now you are getting lower offers than expected or no offers at all. 

    When remodeling, you have to consider the most popular design trends and choose function over form.

    Calculating your ROI can be easily done using the following formula:

    Home Improvement ROI = (Net Gain from Home Improvement / Cost of Home Improvement) x 100

    For example, let's say the cost of the improvement is $10,000 and the expected net gain is $15,000. 

    Difference = Net gain - cost = $15,000 - $10,000 = $5,000 or a 50% ROI

    The three best home renovation projects that yield the highest returns:

    1. Kitchens and bathrooms - these will always be a great opportunity to receive a great return as long as you remodel according to the general population's taste, don't over remodel, and remodel according at an equal aesthetic and cost to other homes in the neighborhood. 

    You won't want to put in a luxury bathroom in a mid priced neighborhood. Why? Because the appraiser will not be able to account for the cosmetic improvements in his assessment and you will not be credited for the investment on the market analysis.
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    2. Finish the basement - A basement remodel can yield an excellent return with a little paint, drywall, and flooring. This increases the heated square footage of your home and can put you in a different price bracket all together. Also, with the move towards generational living and using the home you have to offset your mortgage, a basement is a great space to add a kitchenette and extra bathroom. Now the home can be advertised as including a rental living space making it much more appealing to buyers looking for second homes and investment properties.


    3. Upgrade the curb appeal - Curb appeal does not just include landscaping but also encompasses windows, siding, driveways, paint, and garage doors. These upgrades can significantly change the "face" of your home and make it look a lot more appealing upon buyer drive-bys, a classic method of predetermining interest before scheduling a showing. 

    This dated 50s style bungalow looks like a completely different modern cottage now. And while you don't have to go to this extreme, even doing something as simple as adding shutters can make a huge difference.


    Which home improvements are the worst investment?

    Luxury, entertainment, and aesthetic only upgrades

    These include:

    Pools and hot tubs
    Renovations using expensive materials like marble flooring or copper bathtubs
    In-home movie theaters
    Backyard sports courts
    Specialized spaces like wine cellars

    While these may yield a return if you live in a luxury home community where specialized features are expected, renovations like these in a mid priced neighborhood yield a 0% return.

    The rule of thumb is: Aesthetic or entertainment upgrades that do not increase the square footage of the home do not add value.

    List of projects and their estimated ROI
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    Questions to ask yourself if you are thinking of a renovation:

    Is my renovation plan "trendy"?

    Will these renovation plans stay within the bounds of what is "normal" in my neighborhood?

    Is my renovation adding square footage?

    Is my renovation making my house more functional?

    Am I choosing materials, appliances, and finishes that are well-priced?

    Is the main motivator behind this renovation my own quality of life?

    If so, how long do I plan to stay in this house before moving?

    When renovating, stick to the "middle of the road" and make sure that the renovation is for a sale in the coming season. You want your home to look as fresh as possible when it comes on the market. Stay neutral, stay grounded, and have your financial "thinking cap" on...you will do just fine!

    If you need recommendations for contractors or vendors that are trusted with good quality and work ethic, please give me a call! That's one of the benefits of working with a local.