Is Remodeling a Good Real Estate Investment?

Get help figuring out which remodeling projects are the best investments.

Most of us would like to think that remodeling is a solid real estate investment, especially if it means getting that new media room that you've always wanted - you know, the one with the wall-sized television, plush sectional sofa, and those comfy chairs that swivel, glide, and recline. Unfortunately, in today's struggling economy, that isn't always the case. That isn't to say that some remodeling efforts can't give you a good return on your investment, either in the comforts and conveniences you gain or in the resale value.

There are some important things to consider before deciding whether remodeling is an investment worth making or not.

Be Realistic

  • Why are you doing this home renovation?
  • Is it to benefit your lifestyle, add value to your home, or both? (Answer honestly.)

Maybe you're adding top-of-the-line appliances because you're a chef, and you need the best oven and cook top to work on your latest culinary masterpieces. Maybe you've worked hard all of your life, and you deserve (and can afford) that new bathroom with a Jacuzzi tub, double sinks, and heated flooring. And maybe, just maybe, you know that your home's siding in disrepair and needs to be fixed before it gets worse and causes damage to other parts of the home.

Whatever the case may be, you need to be realistic about the reason why you're doing the renovation and about what you expect from the result. If you aren't much of a cook, and you really don't like to cook, you probably don't need the best of the best in appliances. And most people don't need and can't afford the most expensive appliances, so the return on investment won't be there either. If you're a really busy parent with four active kids, a demanding job, and a social life who spends very little time in the bathroom, maybe you won't get as much use out of that new Jacuzzi as you'd like to think you would. Now, if the enamel on your tub is chipping, your floor tile is cracked, and your sink is country rose in color, maybe it is time for some updating - done wisely, of course.

Know What the Renovation Will Cost You

  • How much will it cost?
  • Are there ways to do it less expensively?
  • Do you know the best places to spend money and where you can lower your costs?
  • How much does cost matter to you?
  • How much of your time will this project take?

You can't know if your remodeling project is a good investment if you don't know how much it's going to cost you. If you care about cost, which most of us do, find an experienced contractor who knows exactly what it takes to get your remodeling project done. Ask about price ranges for different materials, how long the project will take, when and how you'll need to be involved (because time is money), as well as the cost of labor, building permits, etc. Try to get minimum and maximum cost estimations, and remember that if you make changes in the middle of the project, that's going to cost you more.

Take a Good Look at the Homes in Your Neighborhood

  • How many homes have been for sale in the past year or two in your neighborhood, and how many of them sold?
  • Are those homes comparable to yours in square footage, number of bedrooms, baths, garage, etc.?
  • Of the ones that sold, what was the selling price?
  • Are there any foreclosure homes in your area?

If you're looking to get all or even a decent portion of your money back on your remodeling project, you have to research the real estate in your area. If the resale market isn't favorable in your area, then you need to be very thoughtful in how you choose to renovate - the rooms, the amenities, the added square footage, etc. Distressed, foreclosed homes, and homes that have been on the market for a year or longer are not positive signs for sellers or the real estate market in general. Especially if the home sales market is tough in your area, think about how the renovation can make your home stand out in a valuable way. If all of the homes in your neighborhood have one bathroom, then maybe it's not a bad idea to add an extra bathroom to yours, especially if it makes sense with the number of bedrooms you have.

Find Out If Your Renovations Add Value

According to Remodeling Magazine's "Remodeling Cost vs. Value Report," on a national level, exterior replacement projects, such as a new front door, add more resale value to homes than other projects. This is primarily because they are less expensive than most other remodeling efforts, and they are non-discretionary improvements that contribute to curb appeal. And the curb appeal of a home adds to the "wow" factor that still draws in many homebuyers.

In fact, the top two projects on the report referred to above are entry door replacement and garage door replacement. Following these two on the list is fiber cement siding replacement, which doesn't come cheap. However, it still manages to gain a solid return and has ranked first every year since 2005 in the $5,000 or more cost category. This makes it another good investment, that is, if you don't already have high-quality siding that's in good condition.

Overall, the trend seems to be frugality, strongly influenced by (if not dictated by) the current economic situation. Even among the non-replacement projects, those that cost less rank higher for resale value. Adding a wooden deck is less expensive, and homebuyers see it as a home essential, especially those living in areas where outdoor spaces are common. Kitchen remodels can run the gamut when it comes to cost. But minor kitchen remodeling projects with price tags less than $25,000 are safer than most indoor remodeling projects; because that's still enough money to make significant, noticeable updates a kitchen, which is often perceived as the most important room in the house.

Two projects that are somewhat expensive, but that do well to add value are basement remodels and attic bedroom remodels. This is because they utilize existing square footage to add livable space and possibly extra bathrooms.

The most important thing to take away from this article is that you have to analyze each remodel, alongside the real estate market, not only nationally, but locally too. Adding a hot tub to your ski lodge in Aspen is probably a better investment than adding a hot tub to your Key West beach house. Adding a back-up generator might do well now in New Orleans or areas where damaging storms may occur. Storm windows are likely to be a big plus, if not an absolute necessity, in northern states, such as Michigan or Washington.

So think about what you want, what makes sense for your area, and by all means, contact a licensed remodeling professional or general contractor to get a price estimate and a plan before you make any firm decisions.

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