Are home improvement projects really investments?
During my junior year of college (circa 1999), I decided that I should have a “Clooney.” Yes, a Caesar. Yes, a terrible terrible haircut…for anyone who doesn’t look like George Clooney. I thought it was pretty awesome. I kept telling myself it was awesome. Even my fiancee’ (now known as Mrs. Planner) thought it was bad. As did my friends. As did my parents. But I am strong willed. I just KNEW it was awesome. I just really wanted awesomeness to be the case. It was not. Just because you have a thoughtful desired outcome doesn’t mean that your perception is reality.
Take for instance, home improvement. The term itself is a sales pitch. Something that is improved must be worth more money, right? I don’t know. Ask new Coke. The operative term that we are dealing with today is value. There’s personal value and there’s resale value. The confusion between the two concepts goes a long way in explaining why people make so many home improvement mistakes. To extend my earlier example a bit: my bad haircut had high personal value, yet very low resale value.
This all became relevant when Mrs. Planner and I decided to finish our basement. Don’t worry, we didn’t take out a home equity line of credit (HELOC) or use emergency reserves. We saved from scratch. As we were discussing the design plans one thing became abundantly clear, BS justifications had become a factor. “Well, we could spend the extra money and do ____. It will only go to increase the value of our home.” I had to step away from the situation, and treat it like someone had asked me my opinion about their situation. Did more expense equal more increased value? There has to be a tipping point, right? There has to be a baseline of some sort. $10k into a basement remodel may increase the home’s resale value by $10k, but a $25k remodel may only increase the home’s resale value by $14k. Unfortunately, every situation is different.
We have to have a baseline. We must. Therefore, here is a list of home improvement projects and how much of the expense of the improvement may be recouped by an increase in resale value.
- Basement or other unfinished space finishing- 50-90%. Thus a $30,000 basement improvement would potentially lead to an increased resale value of $15,000-$27,000.
- Kitchen remodeling- 70-120%.
- Painting- Up to 300%
- Bathroom addition- 90-130%
- Bathroom remodel-65-120%
- Window/door replacement- 50-90%
- Deck addition- 65-90%
Just about everyone has heard that swimming pool additions add absolutely no resale value, and in some cases can decrease property value based on the high cost of maintenance. But did you know that landscaping doesn’t add much value either? It may add curb appeal, but it won’t add a great deal of resale value. Both of these things add a great deal of personal value, and if you have the financial resources to fund these purchases, then have at it.
No matter what project you choose, using debt to fund these home improvement projects is not a great idea. Check that. It’s a great idea…according to your bank. But then again tanning is a good idea, according to tanning places. You’re house is NOT A PIGGY BANK. Although you can borrow against it for things that you deem to be important, you should not. Did I mention that my assertion is now supported by…the Great Recession of 2008?!?!?! The financial meltdown that we are now (arguably) exiting was fueled by homeowners that stripped equity out of their homes. Home improvement projects funded with HELOCs was a bank marketing gimmick gone awry. It was a bad idea then. It’s a bad idea now. And it will always be a bad idea. Fund home improvement projects with money that you have saved. And by saved I mean “in addition to your emergency fund money (3 months expenses).”
But what about sweat equity? Sweat equity is real. Basically, sweat equity is the concept of doing the work yourself, and not paying labor costs to finish a home improvement project. If you have the skills, then doing some of the work yourself could really improve your chances of increasing the value of your home in proportion to your expenses. Labor expenses often double the cost of home improvement projects. If you knew what the hell you were doing, a $10k (with labor) bathroom remodel may only cost you $5k (by doing the work yourself). This would almost guarantee that you recoup your costs via increased resale value. However we now have a J-Lo problem: a big but. The big but is: if you don’t have the skills to complete a home improvement project, your attempt to do so could result in big big big trouble. Not only could you ruin something, but you could break the law, get hurt, and anger your spouse. In other words, it’d be like if you went on Spring Break and everything that could go wrong, did go wrong.
The bottom line is pretty simple
- Choose your projects wisely
- Be realistic about how much your home’s resale value will actually increase
- Don’t go into debt to remodel
- Utilize sweat equity when applicable
******BTW, there’s no way that I’m posting a picture of that haircut. Not good.