With the stock market doing an about face recently and with housing prices continuing to rise, many homeowners are surprised to learn that the equity in their home comprises a larger portion of their net wealth than the holdings in their stock market or retirement funds. Compared to conventional financial investments that rise and fall with regular frequency, housing has proven to be a relatively stable and sound investment that keeps up with inflation in most years and outpaces it in others.
Although few of us purchase a home strictly for its investment value, in practical terms it represents an asset that can pay high returns when it comes time to either refinance the mortgage or sell your home outright. Of course, a home that is well-maintained and offers up-to-date systems and amenities will have a higher value than a comparable home that is poorly maintained or lacking the conveniences and extra living space that today’s buyers want. Remodeling, then, becomes the key to protecting and enhancing the investment value of your home, not to mention its many other benefits.
NAHB estimates that owners will spend a record $150 billion in 2001 on maintaining and improving their homes. There are several factors driving the demand for remodeling, but one of the most important is the sharp increase in housing values over the last several years. With home prices escalating virtually almost everywhere, and in some metro areas at double-digit rates, more homeowners are turning toward remodeling to add to their enjoyment of living in the home, but also to boost the value of their original investment.
“What improvements will add the most value to my home?” To answer that question, it is important to understand that remodeling – and your home for that matter – are different from
other investments that are primarily financial in nature. What’s unique about housing is that the “investor” or owner receives the immediate benefit of being able to occupy and enjoy their investment; i.e., live in it, all the while it is growing in value. Stocks and bonds don’t deliver on this aspect.
The longer you intend to stay in your home and will enjoy the new family room or whatever improvement you make, the more weight this factor contributes to your overall return on investment.
The other part of your investment return is the increase in resale value that the remodel adds to your home. Ultimately it is a professional real estate appraiser who will decide the financial return of any remodeling you do through the price he or she assigns to your home when you decide to refinance your mortgage or sell your home. The cold hard truth, however, is that real estate appraisals are more an art than an exacting science.
The price of your home will largely depend on the prices that comparable homes recently sold for in your neighborhood. The value assigned to the improvements you made to your home depends on a number of variables but depend heavily on the location of your home as well as its overall condition. Some remodeling projects lift the value of a home by the entire cost of the remodel and sometimes by even more.
Despite the limitations of the appraisal process in allotting what you might consider fair value for all the improvements that you proudly made to your home since first moving in, there are certain rules that you should consider to increase the dollars you get back from your remodeling investment.
- Maintaining your home in good repair is the most critical of all investments that you can make to your home. The shape it’s in matters as much if not more than what other attributes your home may have.
- The quality of the work you have done on your home is another factor that can’t be ignored, if you are looking to make a good investment. Shoddy workmanship, low-grade materials and inferior products will wipe out any value the remodeling might have added to your home.
- Remodel for yourself and your own family, not the next owner. It is a gamble to predict what the likes and dislikes of the next owner might be. Keep in mind, however, the more your tastes stray from the norm of most of your neighbors, the less likely you are to get maximum return from your improvements. Stay with styles, colors and features that have broad appeal.
- Kitchens and bath remodels are the two most popular remodeling projects year-in and year-out, no matter where you live. Minor kitchen remodels tend to recoup more of their costs than major kitchen remodels. Bathroom remodels also vary on how much they add to resale value, depending on the extent of the makeover. These two rooms carry the most weight when it comes time to sell your home. Attractive kitchens and baths fully outfitted with popular features will not only help sell your home faster, they also can drive the price a buyer is willing to pay for your home.
- Extra space in the right place offers a high rate of return since existing homes tend to lack the roominess of new homes. New family rooms, larger master bedroom suites and eat-in kitchens are all examples of spaces that most buyers value highly.
Although it is difficult to put an exact price on the resale value of a particular remodeling project, for most of us the real value of remodeling is the comfort and pleasure it adds to the years we spend living in our home. |
