June 9, 2010, 4:12 am

Return on Investment: Renovation Costs

by: The Financial Blogger    Category: Properties
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We had a great debate during last week’s post about big cars and money. It is quite interesting to see other people’s point of view about what they are driving and how much money you think they make. However, I was also surprised to see how many people thought that they can get a return on investment (ROI) for their renovation costs (or actually: expenses). It seems as if people believe spending money on their home should be considered as an investment.

Sure improving your house is a great thing, I had actually dropped $10,000 into my basement and I was happy to do so. I’ll be moving again soron and I will surely put a tidy some of money into my next house too. However, I don’t see it as an investment per say. In my opinion, renovating your property will serve a few purposes such as:

- being more comfortable in your home

- keeping your house up-to-date (who wants to have a kitchen sraight out of 1970?)

- keeping the value of your house (when renovating is not an option anymore)

- increasing the value of your house (when you are making improvements).

However, while the latter is true, you won’t get a great return on the cost of your renovations. In fact, when I dropped 10K in my bathroom and my children’s playroom, I didn’t expect to see my 10K grows to 10.5K or 11K in the span of a year. However, if you invest the same 10K in a business or in the stock market, you will expect to get a least $500 in growth at the end of the year (if you are not investing in 2008 ;-) ).

So I went a little bit further in my research about return on investment (ROI) for renovations costs. I went on a few realtors’ websites, home staging tips and finally ended-up on the Appraisal Institute of Canada. This is a self-regulated organization that is reputed to be the most authoritative voice in terms of house evaluations.

They seem to be less than excited about the return on investment for renovation costs too. They even mention the following:

“If the value of your house exceeds the average market value in your neighbourhood, your renovations will not yield much return. But if your house value is below the average, you can recover a larger part of the renovation costs.”

Factors influencing the return on renovations costs

There are a few reasons why you won’t get a positive return on your renovations costs. Among them, there are the value of your house compared to your neighbourhood. For example, in my area, having a oversized ceramic shower became the norm in the new constructions (2007 and recent). Since mine was a 2002, I didn’t have one. When I put $5,000 to finish my bathroom in my basement, I made sure to include a huge ceramic shower. However, this improvement was just bringing my house up to the “average level” of the newer ones. Impossible for me to get back the full $5,000.

The other factors could be lack of taste or choice of materials. You can surely import your marble kitchen counter from Italy and pay $15,000 for it, it doesn’t mean that someone else is ready to pay for your exotic tastes. This is why renovating doesn’t always rhyme with improving ;-).

Also bear in mind that the amount spent on renovation projects should be relative to the value of the dwelling: A $30,000 remodelled bathroom does not belong in a $100,000 house.

If you are looking at what to renovate this summer, here is the list of the top home improvements trends:

SEVEN hot home-improvement trends
- Home theatre
- Hardwood floor in kitchen
- Laundry room on main floor
- Whirlpool bath
- Built-in kitchen appliances
- Office on the ground floor
- Kitchen island

And if you are still not convinced that you cannot get an decent return on investment for your renovation, please see this guideline provided by the Appraisal Institute of Canada on return on renovation costs:

Percentage recovered upon resale
Kitchen upgrade: 75% to 100%
Bathroom upgrade: 75% to 100%
Interior painting: 50% to 100%
Roof replacement: 50% to 80%
Replacement of furnace or heating system: 50% to 80%
Expansion (addition of family room): 50% to 75%
Doors and windows: 50% to 75%
Deck: 50% to 75%
Installation of hardwood floor: 50% to 75%
Construction of a garage: 50% to 75%
Fireplace (wood or gas) 50% to 75%
Central air conditioning: 50% to 75%
Finished basement: 50% to 75%
Wood fence: 25% to 50%
Interlocking paving stones on driveway: 25% to 50%
Landscaping: 25% to 50%
Asphalt driveway: 20% to 50%
Pool: 10% to 40%
Skylights: 0% to 25%

So, is improving your house is an investment or an expense?

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Comments

Love reading this post TFB, thanks. Actually, this is one of those things that I think there is a major misperception about making money when renovating. But I think the same is true about buying and selling or flipping houses. There are so many expenses involved when buying and selling a house (taxes, notary, etc, etc) that you need to make major profits for it be worth it.

I’m not saying that it’s impossible to make a few extra dollars (or even a lot more), but I think that in many cases, people underestimate these costs….

So if I get this right, only 3 types of renovations can even come close to being “worth the investment”.

How about bigger changes like expanding a house? Would that be a better return?

by: The Financial Blogger | June 9th, 2010 (12:21 pm)

@ BMSP,
if you flip houses as a job (i.e. buying, renovation, selling within less than a year) you will probably end-up making profit. but this is a job, it’s not just buying a house, living in it and selling it 5 years later.

@ IS,
I would say that it depends on which kind of expansion and how it is donw. I would stay careful with those as you can add value but you can also decrease the value if the renovations are not done properly.

cheers,

Nice post TFB ;-) I spent a lot of time (and money of course) for renovations of my income property in 2008-2009. I’ve added another appartment, so the income came from 8400 per year to more than 14 000$. We also finished our basement, upgraded our kitchen (was lilac… yacky!!) and we plan to upgrade our bathroom.

We do most of our renos by ourselsves. Since we bought this house, we spent about 40 000$ in renos. I recently look to similar houses near us and they are listed about 100 000$ more than what we paid when we bought the house 3 years ago. Hope this will stay this way… because we plan to sell in about 2 years to move in another town. With the profit, we can pay my husband student loan and my personnal loan and still have a cash down for another house, so it would be great (but just being debt free would be great!!!)

I think that it might be much harder to have a high ROI when you hire contractors to do everything, plus a real estate agent to sell your house if you’re doing a flip.

I still consider home improvements as an expense first. It might become an investment IF you sell your house (or plan to do so) and make enough profits to cover renos costs and sales costs… so take time to think about what needs to be done vs what would be nice to do… and stick to a plan. If you don’t plan to sell your house… never consider renos as an investment.

by: The Financial Blogger | June 9th, 2010 (7:18 pm)

@ Mama Zen,

I am surprise that you are on my side. Usually, people who are renovating or in the real estate business tend to think that everything that is near a brick will create a buck ;-)

[...] Blogger says that home renovations are not a good investment.  How about an [...]

Lol! As long as money is not back in my wallet, it is an expense to me :D When it will be back in my wallet WITH a profit, I will say that it was an investment ;-)

This is a top new landlord mistake too. Hire contractors and pay too much for the wrong renovations.

I had a client who spent $60,000 on reno’s for her income property. Now she wants $400 per suite more than the average suite in her neighborhood. Crazy!