Can They Really Be Considered Investments?
In order to answer the question, it’s important to determine what you expect from your investments.
Most likely, an investor would only consider an investment successful if it provided a “return” on the initial capital invested. However, housing industry studies clearly indicate that most home improvement projects will NOT provide a return on the initial cost of the home alteration, and furthermore, they won’t even allow you to recover the initial capital spent when you resell the home.
Since, in most instances, you don’t even recover your initial investment when you “cash out”, remodeling a home cannot be considered a good financial investment.
However, the decision to improve a home is also a decision to improve your quality of life. If you can assign a value to your family’s enjoyment of the improvement while living in the home, and then factor this “enjoyment value” into your “return on investment analysis”, a home improvement just might be one of the best investment opportunities you’ll ever find.
Important Home Improvement
Decision Making Guidelines:
- The decision to remodel should take into account quality of life considerations,
in addition to, investment issues.
While many alterations will add value to a home, you will definitely not recover all of the remodeling costs upon resale. Quality of life issues, such as, pride in your home, your family’s enjoyment of the alteration, and the improvement of the home’s appeal to buyers in the future, must also be factored into the decision.
- TIME. How long do you intend to live in the home?
If the amount of enjoyment you hope to derive from the home improvement is a benefit that is being factored into your decision, then the longer you intend to live in the house, the greater the benefit that you’ll be able to calculate into your analysis.
- Current interest rates.
If your proposed home improvement involves financing, then prevailing interest rates should be factored into your decision. A favorable interest rate environment might make the home improvement project more affordable than you thought.
- Not ALL home alterations will add value.
Just because you spend money remodeling a home, that does not necessarily mean that you are “improving” the home. There is a huge difference between an improvement and a customization. Home buyers are willing to pay more for homes with 2nd baths, fireplaces, and updated kitchens, so these could be considered “value adding improvements”. Swimming pools, tennis courts, in-law apartments, handicapped accessibility, etc., on the other hand, are considered customizations and will only appeal to a limited number of buyers. And in certain instances, customizations may even reduce a home’s value or make it more difficult to sell.
- Don’t over-improve.
The neighborhood in which you live limits the value of your home. A mansion in a neighborhood of average sized homes will never sell at “mansion prices”. You cannot improve the value of a home beyond price levels that the market has indicated buyers are willing to pay in a particular neighborhood.
REMEMBER: The principles of progression and regression are always in effect. If you have a modest sized house that is located in a neighborhood of larger homes, the value of your home is going to be influenced and lifted by the value of your neighbors’ homes (Progression). And conversely, if you currently have (or are planning to expand your home to become) the largest home in a neighborhood of smaller homes, the value of your home is also going to be influenced and held back by the value of the smaller homes in your neighborhood (Regression).
- Stick with traditional architecture & design.
While it may be tempting to go with the latest decorating or architectural designs, be careful. There’s a fine line between “making a bold statement” and creating a white elephant that might be difficult to resell. Trendy choices are expensive and can quickly become outdated. How long does the term contemporary remain relevant? Today, a 1970’s “contemporary home” is no longer contemporary ... it’s dated 1970’s architecture. On the other hand, traditional architecture, cabinets, windows, tiles, colors, etc. are always in style and will appeal to a much broader group of buyers when it come time to sell your home.
- “Moving up” might be more cost effective than “adding on”.
Investigate the feasibility of buying a larger home in the community before committing to the costs and inconveniences of remodeling. Buying a larger home in a neighborhood that supports larger home prices might be better than over-improving your current home. Read Adding-On vs Moving-On .
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