Why You Won't Capture 100% ROI On Your Home Improvement Project Return to Articles
Why You Won't Capture 100% ROI On Your Home Improvement Project
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Photo Credit: Ivan Samkov. Not all projects are equal when it comes to returns. Know the Cost vs. Value before you get started on your next home upgrade.
If you really look at the economics of home improvement projects, you may be disappointed to learn that your return on investment could be in the red, after just a few short years. To minimize the financial downsides of your renovation, consider these points before taking on that remodeling project.
Know Your Goals
Before hiring a contractor or selecting your finishes, do some soul searching to determine why you want the upgrade. Will it improve the performance or functionality of your space ? Are there safety issues that need to be addressed? Are you renovating because you are motivated by the latest trends on HGTV ? Or do you plan on putting your house on the market within the next year? Knowing your goals could help you save money.
Market Research
Photo Credit: Creative Commons. Tour open houses in your neighborhood to determine what finishes are now standard.
One part of your planning process should include market research. It's important to know the interior conditions of your comparable properties . Let's say the majority of your neighbors have renovated their kitchens, for example. A new standard has been defined. As professionals determine home values in your submarket, then those updated kitchens are now the expectation rather than the exception. Once you know the new baseline, then it is easy to understand if your interiors will recognize a premium or a discount. Keep this in mind if you choose to refinance or sell.
Cost vs. Value
Photo Credit: Raynor.com. Garage Door Replacements yield the highest recovery percentage compared to other remodeling projects, at 94%.
The experts prove that homeowners will not recoup their full investment on any project. According to Remodeling's 2021 Cost vs. Value National Averages Report, the project that captures the highest recovery percentage, at 94%, is a garage door replacement . When determining your budget, make sure to understand the average cost vs. value for your project.
Photo Credit: Upscale kitchen remodeling projects yield only a 54% ROI compared to a minor kitchen upgrade seeing a higher return at 72%.
Let's dive into the numbers a little more by selecting a kitchen remodel as our example. A minor investment around $25k can result in a 72% return. More money means a higher return, right? Actually a major kitchen project averaging $75k with mid-range finishes provides a ROI of only 57%. Now let's compare these figures to a total renovation that cost $150k, including premium finishes. It's interesting that the project with the highest investment provides the lowest return at only 54%.
Depreciation
Another aspect that is often left out of the ROI equation is depreciation. You will capture the biggest bang for your buck within the first year of the project, but the valuation significantly diminishes after five years. When your interiors are 20 years or older, you investment is almost worthless. As trends change and as the condition of the improvement ages, the value will decrease over time . Take another look at our kitchen remodeling project.
Product Selection
We all know the funnest part of a renovation is selecting the finishes . Before you get started, circle back to the reason why you are making the improvement in the first place. Do you plan on putting your home on the market? If so, keep your overall costs down by selecting standard materials, so you can achieve higher returns. Are you renovating your forever home? Just recognize that your selection of premium finishes will be for your own enjoyment. After five short years, the ROI captured for your products will be less than 25%.
What materials should you choose? The experts have yet to prove that any brand yields a higher return than another. However, some products have greater brand recognition, which could imply greater quality or prestige to a potential buyer. When making your product selection, consider the ROI percentages for your project, which can help determine what materials fit your overall goals. While you should always invest in quality materials, don't overpay for premium products when a similar option could provide the same look at a fraction of the price.
Project Tracking
RezDox Home History Log automatically calculates the ROI of each home improvement project, resulting in your total equity gained.
We get it, determining your equity growth is not as exciting as the design process. That's where RezDox does the calculations for you. By managing your projects in your home history log, RezDox automatically captures the ROI and considers the depreciation of your renovations as the project ages over time. We have made it easy for you to know the total value of all of your home projects and the total equity gained from improvements.
Co-founder | CEO RezDox
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