Home Improvements with the Best ROI

Remodeling areas of a single-family house is an excellent way for homeowners to add increased functionality and beauty to a property. Plus, it can often provide a great return on investment down the line. A significant portion of the cost can be recouped from future owners in the form of increased property values if you choose the right project to enhance your living space.

What to Consider Before Renovating 

The return on investment (ROI) of any given renovation project is a function of local market characteristics, the condition of the residential real estate market when the property is sold, and the quality of the work performed.

Certain projects have historically and on average shown the greatest ROI regardless of the property's location or the state of the residential property market. They include electric HVAC conversions, garage door replacements, manufactured stone veneers, steel entry door replacements.

It's unlikely that a homeowner will earn back more than the cost of construction unless the remodeling project is designed to fix a structural issue or a design flaw. Homeowners should consider the tastes of prospective purchasers when deciding which projects to pursue if cost recovery is as important a consideration as increased enjoyment from enhancing the property.

But homeowners should be careful about which projects they choose to complete because the potential value gains can only be realized to the extent that buyers are willing to pay for the renovations. And investors must be certain that any additions will fit into the existing space before the value of renovations can even be considered. This is something that the best home design software can help with.

Consider Your Location

It's essential to ensure that the improvements made are appropriate for the particular type of dwelling and the local property area. One mistake homeowners often make is improving their homes well above the average for neighboring houses.

Buyers are typically attracted to particular neighborhoods because of the services located nearby and because houses in that area are selling within that buyer's price range. A house improved well above others nearby may still receive the same level of interest compared to others being marketed, but it's unlikely that it will command a premium well above average simply because of the extra improvements.

How the Government Can Help

Mortgage interest is tax-deductible so Uncle Sam may offer a discount of sorts on home improvements, making the cost of construction less burdensome for property owners. However, taking a new mortgage is not going to be appealing for many homeowners.

Less risk-aversive property owners who have accumulated adequate equity in their homes can use financial instruments such as a cash-out refinance or a home equity loan to finance their construction projects. The interest on a home equity loan can be tax deductible, but only if the improvements are substantial and meet the IRS's requirements. Interest only options may allow you to delay paying the principal until you have the home sale proceeds in-hand, potentially reducing the up-front financial burden.

Project Returns on Investment

The ultimate reason to take on any home remodeling project as an owner-occupant is the enjoyment you'll receive from living in an updated home. Several sources offer insight into expected payback on specific projects for those who are hoping to also profit from remodeling.

Remodeling magazine publishes an annual "Cost vs. Value" report that compares the cost of common remodeling projects and shows the payback that homeowners can expect. These payback estimates are based on the residential real estate market fundamentals in place at the time, as well as the average cost of construction.

Table 1 contains national average estimates but homeowners can find more specific information at Remodeling Online, offering the same estimates for different geographic areas of the U.S. These average payback ranges for the most common remodeling projects can give prospective sellers a broad indication of which projects have the greatest probability of returning a bulk of the project cost at the time of sale.

Differentials in average recoveries are explained by the scope and quality of the work performed. Smaller, less useful projects are on the lower end of the range.

Source: Remodeling Online

Improvements such manufactured stone veneers, electric HVAC conversions, steel door replacements, and garage door replacements had ROIs over 100%. Of course everyone's ROI will vary and be unique to their specific home. Differences in regional markets, home size and features, personal situations, and much more will cause these variations.

The Bottom Line

Homeowners should consider the value they'll receive from any remodeling project over any cost recovery that might be available from a sale. But they should research local real estate guides to determine which projects are most likely to pay for themselves when contemplating two equally useful changes.

Remember that bigger is not always better and spending more does not always ensure a greater degree of value creation. Home prices will always reflect the tastes of local property buyers and the amounts that those buyers are willing to pay in a particular neighborhood or subdivision.