Rick Goldstein
Return on investment (ROI) is fundamental to the stock market, but for home remodeling or renovation, the concept is more fluid. If your highest priority is to avoid putting more money into the house than you’re likely to get back when you sell it, then achieving a substantial ROI should guide your decisions. But if the comfort or long-term usability of the house is at the top of your list, ROI should be a lesser concern.
The length of time you expect to stay in the renovated home also influences the weight of the strictly financial ROI in your plans. If you regard the home as a short-term investment, getting a good return is critical. But if you expect to remain in the house for a number of years, spending on improvements that make living there more enjoyable may take precedence over projects intended primarily to increase the market value. While the financial or mathematical formula estimating how much you should recoup from your investment is important, it’s often only one part of the overall equation.
As to what constitutes a good ROI on home renovations, there’s no set figure. However, it’s generally best to have conservative goals. Over time, factors such as inflation will raise the value of most well-maintained homes, even without big-ticket remodeling. During the planning stage, it is certainly acceptable, even advisable, to investigate the market by talking to local real estate agents, checking the sale prices of houses with similar amenities, and learning the value of the most expensive homes in the neighborhood. This information should help you set appropriate investment parameters for the area.
You can increase the likelihood of higher ROI by concentrating on the two aspects of home renovation shown to offer the best returns: kitchens and bathrooms. Further down the list are basements, porches or decks, and landscaping. Smaller projects that could pay off include enhancing the curb appeal, which is especially important when you’re planning to sell the house quickly. Window replacements, though, may not pay off for several decades and should not be the first target for renovation — unless absolutely necessary — if the turnaround time is relatively short. While new windows will be more energy efficient, an energy audit could identify other problems you could more easily address to improve comfort and reduce your utility bills.
While you should always consider ROI, don’t feel compelled to abandon an improvement project that would make your home more comfortable but not necessarily generate a big payoff. If you want to splurge on a heated bathroom floor that would help you get every day off to a good start, the psychological boost would be worth the investment.
