Choosing the Right Project for Your Home Renovation
by Nathaniel Sillin
Before the housing market collapse of 2007, buy all renovation projects – no matter how expensive – seemed like winners. Today, cure home renovation is a whole new ballgame and why you should carefully research any potential fix-up project you’re planning for your home.
For the past 14 years, pill Remodeling magazine’s annual Remodeling 2016 Cost vs. Value Report has tracked cost recoupment on renovation projects nationwide and by region, as local tastes are important. Based on trends from transactions tracked in 2015, several guidelines emerged:
- Aim to cover your costs. Pre-housing crash, people were investing heavily in their homes and seeing returns greater than 100 percent on their spending. In 2016, the cost and return at resale for the projects listed in the report averaged 64.4 percent for a home sold within a year of the upgrades. Making a profit on a renovation isn’t guaranteed, so aim instead to tackle projects that will allow you to recover your costs at the highest possible level.
- Smaller projects focusing on essentials can provide better returns. A decade ago, it was an upscale outdoor deck or a gourmet kitchen. These days, new doors, which can cost under $500 to replace and install, are one of the most popular projects. A high quality fiberglass entry door replacement can recoup an average 82.3 percent of costs; a garage door replacement can return over 90 percent.
- Upgrade rooms and spaces, but keep it modest. A minor kitchen remodel including upgraded cabinet fronts, new hardware and the addition of one or two energy-efficient appliances averaged a return of more than 83 percent of original cost compared to the 65 percent for the gut jobs.
After assessing the national and regional averages, you’ll need to evaluate your personal situation, local home market and the type of homes that are selling in your neighborhood. Let’s start with the questions you need to ask yourself:
- What kinds of improvements make sense for my neighborhood? Generally, exterior renovations that complement nearby homes have greater value, so consider how your new exterior might fit in with other houses on the street. As far as interior renovations, keep your spending in line with your future sale price. For example, a $100,000 kitchen in a home that might not sell for more than $300,000 would probably be a wasted investment – but a kitchen update worth $10,000 or less might help your house move quicker once it’s listed for sale.
- How long will I stay post-renovation? Remember, the latest Remodeling magazine numbers cover only one year of cost recovery on projects. People renovate for a variety of needs, either to make the home more livable or to make it more salable. The longer you stay, the more you’ll get out of the investment – but if you have to sell soon, think carefully about what you’ll need to spend to attract a buyer.
- Will this send my property taxes through the roof? Renovation projects that create larger homes can risk higher property taxes. You should think through potential property tax impact not only for yourself but also for your future buyer. Consider checking with your local residential taxing body to determine “before and after” property tax rates for renovated properties in your vicinity. Sometimes this information might be available on their websites. If you know a real estate broker with significant knowledge of your immediate neighborhood, you might consider speaking with them about this issue.
Consider consulting experts to help you answer the basic questions you’ll have as you make this decision. Start with trusted financial professionals who can offer a second opinion on what you’re planning to do, how much you want to spend, and what particular tax issues may arise when it’s time to sell. If you need to borrow to renovate, that means it’s time to make sure your credit reports are accurate and you are pre-qualified or pre-approved for your loan based on what is required.
In short, do your homework before you renovate your home.
Bottom line: In 2016, home renovation is far from a home run. Know how long you’re planning to stay in the home before you start and make sure the project you choose makes sense for your local marketplace or you won’t get your money back.
Nathaniel Sillin directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney