One of the best investments you can make is investing in a house. But home ownership is not static. Upkeep and maintenance are critical, but savvy owners know that improving your home can be a great investment as well. Smart remodeling choices can give you great R.O.I when you put your house on the market.
What Does R.O.I. Stand For?
R.O.I. is Return On Investment, a key concept in any investment. The idea is to get the maximum return for the minimum investment—not just investment of money, but also of time and effort.
When deciding which home improvement project is right for you and your investment in your house, you should make the distinction between Lifestyle improvements and R.O.I improvements.
- Lifestyle improvements are important to your family that may not be worth as much to a potential buyer, such as an inground pools or tennis courts. These projects may improve your home for the members of your family, but they often do not provide a good return on your investment when you sell your house.
- R.O.I. improvements are specifically designed to increase the perceived value of your house to a buyer. Since ROI improvements are all about money, you have to look at the bottom line—the return on your investment. Additional bedrooms or bathrooms, minor kitchen remodels, and improving the appearance of your fireplace are all good investments that increase the sale price of your home while making it more attractive to buyers in general.
Understand that you should not view all Lifestyle improvements as useless or bad and all R.O.I. improvements as good. If you and your family really want something, it might be worth doing even if the improvement may not offer a great return.
How Do You Decide on the Right Remodeling Project?
As part of the decision-making process, ask yourself the following questions:
1. Where do I want to be in the next two years? If you plan to sell your current home in the next 1-2 years, some projects will not give you a good return on your investment. You may want to concentrate on maintenance along with quicker and cheaper projects improvements that are attractive to buyers.
If you plan to live in your house for several years, then projects such as adding a second story, a deck, or an upscale kitchen or bath may work better for you since your family can enjoy them while your home appreciates in value. This appreciation can offset much of the renovation cost.
2. Does the project fit the neighborhood? The houses around you can have a big impact on the value of your home and which projects will give you the best return. For example, if your neighborhood consists mostly of two bedroom, one bath houses, then adding multiple bedrooms to your house may not give you the same return you would get in a different neighborhood. This is called “overbuilding,” and it means the smaller, cheaper houses around yours will lower the value of your house—no matter how nice it is. In this case, you may want to improve the existing components of your home, such as replacing windows or remodeling an ugly fireplace.
3. Is the project worth the money, time, and effort? This is the key consideration. If you want to calculate the R.O.I. for a project, you should take the increased value of your home after the improvement and divide that by the cost.
The chart shown below details many home improvements and their average R.O.I.:
In the next post: home improvement project ideas offering good returns on your investment, including fireplace remodeling projects.