Remodeling: The Investment You Can Live With

Most people remodel their home to make it better fit their needs and desires. They upgrade the kitchen, build a deck, or add a bathroom to make day-to-day living more practical and enjoyable. But the role of investment remodeling is an important financial consideration for homeowners and house-flippers alike. With today's uncertain housing market, it's never been more important to monitor the possible consequences of your remodels. The former wisdom that investment remodeling can essentially pay for itself has become increasingly dubious, but added property value is still critical to help homeowners defer and justify a large portion of the cost.

Investment Remodeling: Home Maintenance
From a straight financial standpoint, it makes sense to maintain the home well. Taking care of small problems while they are still small can eliminate the need for larger, more expensive repairs. Problems that are ignored tend to foster additional problems. For example, a simple thing like clogged gutters can lead to wet basement problems and even pest infestations. A leaky roof can destroy insulation, drywall, and more pest infestations. Shifting foundations can cause window and door damage, cracked drywall, exposure to radon, and more pest infestations. Each can significantly hurt your property value when it comes time to sell your home.

Wise Home Remodeling Choices and Return on Investment
But what about big expenditures like remodeling a kitchen or creating a master bedroom suite? Clearly such improvements can have a very positive effect on lifestyle and comfort, but how do they fare as investments? A number of national magazines publish detailed guides to the return on investment of various kinds of remodeling and home improvement projects. One leading magazine, Remodeling Magazine, suggests the return on investment for every mid-range home improvement has declined over the last year. With plummeting home values, this is no surprise. Yet, the decrease has been marginal with most projects losing only 2-5% of their value.

Your Neighborhood and Investment Remodeling
Of course, these averages may not reflect specific circumstances that can increase your property value and the resale value of your remodeling projects. Generally, good rates of return are most likely in circumstances where the home is catching up with other homes in the neighborhood. If the house is among the lowest priced homes in the neighborhood, then a large investment may garner significant returns.

This is most likely to happen in a close-in, older neighborhood where the original houses were quite small. Over the years, as the value of the underlying land has risen, many of the homes have been added on to and remodeled extensively. Eventually, most of the homes have been upgraded. Remodeling and enlarging the home to meet the new standard is usually a great investment. Similarly, investment remodeling in an urban neighborhood that is rebounding can be a wise move. Sometimes run-down homes are available at a very low cost. Some people make a career/hobby of buying such homes, gutting them, remodeling them, and reselling them for substantial returns.

Home Remodeling vs. Home Restoration
Sometimes a fire or major repair requires you to redo part of the home. In that case you might be comparing the pros and cons of just replacing what was there with substantially upgrading the spaces to meet modern standards of looks and function. A simple home restoration is likely to recover the value that was lost, but is unlikely to add new value to the home. On the other hand, a home remodel will almost certainly add new value. To make the decision, take the net costs of the upgrade and deduct the costs of the simple replacement. You can also deduct any insurance money that may be involved. When you add it all up, it almost always makes sense to go with an upgrade.

Living with Your Investment Remodeling
For all your financial research and planning, homeowners who don't plan to sell their home in the next few years shouldn't get too carried away with current numbers or wisdom. Home value and value in remodeling is uncertain and fluid. Five years ago, Remodeling Magazine didn't even track home office remodels. Now, it's sandwiched between a garage addition and a major kitchen remodel. If you can see you a substantial impact on your everyday life from your remodeling project, chances are several prospective home-buyers will see it, too.