When you dream about renovating parts of your home, you think about the fun stuff.
You go on Pinterest and look at the trendy ideas for backsplash, or imagine how to make your living room cozier. Basically, you get all caught up in how things would look, but you forget about what this will do to your bank account.
The thing that Pinterest doesn’t tell you is that renovations are investments, and they can either make you wealthier or make you burn through your money. If you continue down this road of focusing only on aesthetics, you’ll have no idea which investment you’re picking until it’s too late.
So how do you figure this out?
You’re not an investor, but surely, there’s a way for you to know if your money is working for you or not.
What Actually Goes into Renovation ROI
ROI, or return on investment, sounds like fancy financing jargon, but really, it’s nothing more than a reality check.
And a renovation ROI comes down to a comparison. You look at what you’ve spent on the project and then measure that against how much the property’s value jumped because of that work. So, if you spend $50,000 (USD) and the value of your home goes up by $60,000, you’re good. But if it goes up by only $30,000, then, well… You’ve renovated, and that’s it.
Nothing else to show for it.
The tricky side to this is that the costs are usually higher than people expect.
They’ll factor in the price of the new tiles and how much they have to pay the contractor, but that’s not the whole story. You also need to think of permits, the architect, the design fees if you use them, the inspection, and the markup that contractors need to cover their own overhead. On top of all that, you also need to leave a buffer because if you don’t, your ROI calculation is already wrong.
Once you have those numbers, then you have to figure out the value after work.
There’s no sense in guessing what your home is worth; you have to look at actual data. Check out other similar properties for sale in and close to your neighborhood. If you go too far with improvements or build a mansion in a neighborhood that has only starter homes, you won’t like the math.
‘Gross return’ vs your ‘real return’ is yet another set of numbers to think of.
Gross return is the simple math – it’s the value you added by making improvements. Real return, however, is the money you walk away with. In order to get that number, you have to subtract ALL your costs, meaning financing, property tax hikes, higher insurance premiums, and other transaction expenses when you eventually sell the house.
Speaking of financing, that’s a huge factor because the way you pay for the project can completely change your ROI. If you’re using a loan with high interest, for example, you’ll need the value of the property to be much higher than if you were paying cash.
You might want to compare several options of funding for residential renovation projects before you move forward.
Renovations That Pay Off and Those That Don’t
Many people get tempted into spending money on things they love instead of things that pay off, and that’s okay if you’re not expecting any return out of the renovation.
If you are, though, you have to know which projects are worth your money and which ones aren’t.
The ones that pay off aren’t very fun. For instance, rearranging the kitchen layout so it flows better is a good investment, even though picking out new tiles and cabinets is more fun. Updating a bathroom so there aren’t any leaks is another example of a good investment, yet people tend to focus more on marble tiles.
Replacing windows, adding new insulation, upgrading the roof, the plumbing, etc., it’s all boring, but it all pays off. For buyers, it means less work and less worry, and you can be sure they’ll notice all of it. The stuff that doesn’t pay back is all the fun stuff you see on Pinterest, like the luxury finishes, trendy design, customized cabinets, and so on.
There might be some buyers who like it, sure, but your pool is a lot smaller if you go this route.
But the worst thing you can do is do too much for the house.
For instance, you live in an area where the average cost of a property is $500,000, and you go and put a million-dollar kitchen in. Makes pretty much zero sense because buyers shopping in that area are interested in the price range, not the overpriced details.
Conclusion
Math might not be anyone’s favorite part of a home renovation, but it’s necessary if you’re not renovating just for funsies. You have to count every single cost and be honest about the area you live in.
But possibly the most important question you need to ask is whether this project is done for a potential buyer sometime in the future or to make yourself happy right now.
There’s no wrong answer here, by the way, it’s not a crime to spend money on things you love. Just know what it is you’re doing.
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