Are home improvement projects really investments?

Courtesy of IC

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%
Source HGTV

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.

8 thoughts on “Are home improvement projects really investments?

  1. Great post! I must comment on one statement….
    ” 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.”
    As with kitchen, basement, or even painting you must choose wisely with what is done in the landscape. A living room wall with a painted chaulk board may not add much value (yes, my mother just did this to create a play area for grandchildren), but this would be value in a personal choice. A house with good landscape will get buyers in the door. A house with broken sidewalks, poorly placed shurbs/ trees may cause people not to even want to see the inside of a house. Landscape must be done right to add value. Framing views, framing the house, creating outdoor usable spaces all add value to a home. A few shrubs from Lowe’s planted would not add much value, but a well tought out, planned, and executed landscape can and does add value. Just like a basement and kitchen remodels, it starts with a plan.

    “Spending 5 percent of the total value of your home on landscaping, and doing it wisely, you can add 15 percent or more to the value of your home.”
    Smart Money magazine , March 2003

    http://www.asla.org/nonmembers/publicrelations/homeowners_guide.htm

  2. While I agree with everything that you wrote, I completely disagree with Smart Money. That is an absurd statement by them.

  3. Smart money comment is a bit over the top! I just saw that and thought I would include it. A little bending of the numbers to come up with their statement.
    There is def a balancing act in all home renovations. As you know never have the largest investment in the neighborhood.

  4. Pete, I believe those resale values are VERY inflated. I have been a Realtor for 21 years and I have not seen that kind of return on kitchens, windows, etc. Adding finished space is accurate, basements and ADDING a bath.
    Homeowners falsely believe new windows, roofs and a $50,000 kitchen will add value. It will to a point BUT not that much. It will make it more marketable absolutely. I have told many clients over the years that all homes have a roof, windows, kitchens, being new is nice but it does not increase the home value by that much. A $200,000 house is a $200,000 house.

  5. Hi Pete, great post! Followed over from Twitter. Real world example: My husband and I are relocating from Lafayette (Indiana) to So Cal in the next month or so for his job. I just listed our 1920s Craftsman bungalow on Thursday, with the same realtor who sold a neighbor’s VERY comparable 1920s bungalow about 3 months ago. Pretty much the same floorplan as ours. The other house has a TON of curb appeal – new fiber cement siding (MONEY), new reproduction historical windows (MONEY), perfectly maintained 1 car garage/workshop, lots of landscaping (MONEY). Our house lacks the curb appeal of the other house, but we are on a better street, our interior is much nicer with a larger kitchen, all original woodwork, AND we have a full/completely finished and updated basement with a full bath and additional bedroom. We have refrained from putting any money into the exterior, as it’s perfectly functional even though it’s a bit dated.

    The point of this whole story: Their house sold for approx. $3000 more than we are expecting to get for ours, and they probably poured over $20,000 into their exterior improvements and a bathroom reno. Would I love to have a period correct exterior and a restored 1920s-style tiled bathroom? YES – but putting that kind of money into a house we knew we’d probably sell in the near future was a waste in our opinion – and the sale of their house has just proved that we would NEVER make our money back on most improvements. However, our finished/remodeled basement has added $20,000 to our home’s value compared to others in the neighborhood. We did the work ourselves except for the carpet install, improving on the original finishing done by the people I bought the house from 3 years ago. Total cost to update the basement was around $1600 for carpet/paint/electrical etc.. Not a bad return on investment.

    That being said, I’m a firm believer in loving the house you’re in, and making your house into what you want it to be – within reason. We are currently in negotiations for a cool 50s modern ranch fixer-upper in California, which we will be in for many, many years. I plan to put more money into that house, but only out of our budgeted savings, taking on projects as we can pay for them. No loans! I’m 27, a proud homeowner, and trying hard to be a SMART homeowner. This post was very timely for us.

  6. Smart money magazines comments about landscaping, and the value it added, were made in March of 2003. Everything was overinflated then-thus the problems we are in now.

  7. LOL so don’t go into debt for a home remodel but if you can afford it, go for it. Got it 😉 Definitely need to be smart about these projects but if it’s beneficial, then I agree it’s worth it.

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