Renovations That Give You a Return on Your Investment
Top of the list: kitchens and bathrooms. Pools sink to the bottom, though.
It's the fundamental question facing anyone who has ever embarked on a home renovation: How likely am I to get the money back when I sell my house? There's no easy answer, because what a buyer might be willing to pay depends on many factors — everything from the choice of project to the materials you use to the value of other homes in your neighborhood. But it's important to have some idea of what your improvements might be worth. If you want to invest more than you can hope to recoup because you love your house and plan to live in it for a long while, that's fine. But consider the following guidelines and you'll avoid unpleasant surprises when it comes time to put up that For Sale sign on the lawn.
Projects That Pay
Not all remodeling projects are created equal. "People buying a house look first at kitchens and baths," says Kermit Baker, director of the remodeling futures program at the Joint Center for Housing Studies at Harvard University. So while these rooms can be the most costly to redo, they're more likely to pay for themselves. Adding rooms, such as a family room or master suite, also tends to fare well at resale time: Bigger homes command higher prices.
At the other end of the spectrum, swimming pools hardly ever return their cost, because a lot of buyers aren't willing to shell out more for a house just to acquire what they consider a maintenance bother. Home offices tend to be low-return for the same reason: Only a handful of buyers will want a room designed for working. (Think of it this way: How high a premium would you be willing to pay for a convertible if you were never going to put the top down?)
And just because a project is expensive doesn't mean it will pay back more. Often, minor improvements can yield major dividends. According to Remodeling magazine's annual analysis of cost versus value, a kitchen "face-lift" — painting, refinishing surfaces, and upgrading appliances — will return more than a full redesign. The key to spending less is spending it wisely. "If you take $20,000 and spend it judiciously on a kitchen, you can make it look a million times better," says Remodeling senior editor Jim Cory, who supervises the survey. "The design and product selection are key."
Styles That Last
Even when your remodeling job is an appealing improvement for most buyers, it adds little value if done to just your taste. "You might want a room in your house in the shape of a cat or a mouse, but can you find a buyer who wants it?" says Gopal Ahluwalia, director of research at the National Association of Home Builders. "You have to think in the back of your mind that you're going to have to sell someday."
If you're living in a Craftsman gem and want to tack on a family-room addition, for instance, keep the design in harmony with the original look and feel. That goes for the height of the ceilings as well as the style of the windows and moldings. "You don't want to lose the integrity of the house," says Bobbi Chasin, a real estate agent in Evanston, Illinois. "Putting a big box on the back of the house will spoil the entire appearance."
The same holds true for smaller projects, too. For example, when choosing kitchen cabinets, countertops, and flooring, aim for classic or neutral colors and styles. "Years ago, I had a client who wanted a purple kitchen, to match the purple grout on her fireplace," says Mark Scott, a remodeler in Bethesda, Maryland. Scott argued strenuously against it, but the homeowner insisted that she was planning to stay in the house for the rest of her life. If you can't make that kind of commitment, don't expect somebody else to pay for your unique and funky choices.
The Neighborhood Matters
Before Kevin and Julianne Warren spent $42,000 to remodel the kitchen in their nicely detailed 1950s ranch house, the home was probably worth about $150,000. But their location, the Forest Hills section of Grand Rapids, Michigan, gave them confidence that the improvements were a smart bet. "This is a high-end neighborhood for schools. Everyone tries to get into this area," Kevin says.
Even better, the Warrens' home is surrounded by properties worth $200,000 or so. That means they haven't priced themselves out of the local market, a very important consideration with any remodeling project. "Are you going to do work that makes your house worth $300,000 when it's sitting in a $100,000 neighborhood?" asks Israel Ramos, a real estate agent in Phoenix, Arizona.
"Don't exceed the ceiling for the neighborhood, or you won't get your money back." Just as your home's cost should be in line with your neighborhood, your improvements should be in line with the value of your home. In Seattle, real estate agent Kay Rigley recently discovered that a former client spent $90,000 on remodeling two bathrooms, complete with heated floors and Italian tile. "I said, 'I wish you had talked to me first,'" she says. Between what they paid for the property and other improvements, the owners spent more than half a million dollars on a home that Rigley estimates is worth $450,000 at most.
What part of the country you live in affects several remodeling decisions. Labor tends to be cheaper in the South than the Northeast, for example — enough so that Remodeling's annual survey prices the same master bedroom suite at $59,401 in Louisville, Kentucky, and $73,814 in Westchester, New York. Local factors also influence demand. Buyers everywhere will probably like a new, well-appointed family room. But fireplaces sell better in the North than in the South, and decks add more value in warmer climes. There are no hard-and-fast rules, but keeping an eye on local trends is a good way to ensure that your choices will appeal to house-hunters.
Where regional differences really come into play is in the real estate market. If housing is in great demand, buyers are likely to be willing to pay more for your improvements. Bethesda builder Scott says he billed $300,000 recently for an expanded kitchen, breakfast room, and study — the most expensive renovation per square foot he's ever done. But the couple got the money back when they bought an even bigger house last year. "Around the Washington, D.C., area, it's way different than Missouri," Scott observes. "People are paid an awful lot of money to be here."
Be careful, however. Even in a strong market, you can over-renovate. Brett Weinstein, a real estate broker in Oakland, California, has lived through the Bay Area housing boom. While prices remain high, he says, "if someone paid $200,000 over the asking price last year, they bought when the market was red hot. So if they want to spend $60,000 for a kitchen remodeling, they're going to have to live there a little longer to see that money back."
As Weinstein points out, the longer you stay in your house, the more likely you are to recoup your costs. With home prices rising about 5 percent a year, your outlay will eventually be absorbed into the increase in the property's value. (Plus, you'll be able to enjoy your renovations for those years.) A few caveats: There is no natural law that says prices must go up, so don't depend too heavily on that annual bump. And remember that sometimes life can throw a curve, and you might have to put your house on the market sooner than expected.
For some projects, time also works against you. "There's stylistic depreciation," says Harvard's Baker. "All the fads now are for knocking down walls and making big rooms. But ten years from now, that might not necessarily be the case." Kitchens and bathrooms are especially prone to looking dated, as anyone who has blanched at discovering avocado-green appliances in their dream house can tell you.
If you think a project will pay for itself, but just barely, be prepared for something to tip the balance against you. Home renovation is rife with "hidden" expenses: the extra costs when a project takes longer than planned; the experts' fees for asbestos testing or heat-loss calculations; the monthly interest payments for a home-equity loan. Not to mention the higher property taxes you may have to pay when your new-and-improved home is reassessed.
When all is said and done, most experts counsel against home improvement as an investment. Be smart about what you spend, sure. But a new deck isn't a mutual fund. Real estate agent Chasin suggests that once you've done your homework, make your decisions based on what you want and what you can afford. "I had a listing where the husband had taken an early retirement, so his wife convinced him to put in a very expensive home office for $50,000. Ultimately they moved to Florida, and they didn't get the money out of that home office," Chasin says. "But she didn't care. It made him happy."
Payback by the Project
Since the mid-1980s, Remodeling magazine has done an annual analysis of cost versus value for residential remodeling projects around the country. By polling real estate agents and appraisers in various regions, the editors determine about how much projects cost to complete and how much those improvements might add to a house's selling price one year later. The report is widely considered the most authoritative study of the subject. But even Jim Cory, the editor in charge of the survey, admits it only goes so far. "We provide a benchmark with our study," he says. "Cases have to be decided on an individual basis."