What home improvements give you the biggest return on investment?
A common challenge for homeowners is figuring out which home improvement projects really pay off.
As homeowners, we want to spend money wisely. And, we also want to add joy to our lives by improving our homes. It’s a balancing act, for sure.
Luckily, there’s research available about how much bang for your buck that certain home improvement projects give you, to help you gauge your return on investment.
Let’s talk about some general rules of thumb, and then we’ll dive into the data.
Your return on investment often depends on your market
If you install a $40,000 wine cellar in a $200,000 home, you might not get much return on your investment because the home buyers shopping in your area might not pay a premium for that.
What you get back from your investment depends on the value of your home, what features other homes around you have, and what the market is like. For example, if all the houses in your neighborhood have two bathrooms and yours has only one, you might consider investing the money that you would have spent on your wine cellar in another bathroom to make your home more competitive in its market.
In other words, a wine cellar might not appeal broadly to buyers looking in the $200,000 range, whereas an extra bathroom might.
Keeping the structure sound as a first priority
If you are thinking of doing a full kitchen renovation but your basement smells musty because water is leaking through the foundation, that could be a serious deal killer for a lot of home buyers.
It’s smarter to spend money to resolve structural issues first before anything else, as many home buyers may not even consider your property at all if the home does not seem structurally sound. Home buyers who find structural issues may think: “money pit”, and factor that into their offer. Other times, structural issues may make home buyers simply walk away.
Return on investment varies by region
Certain repairs, particularly maintenance-related, have different returns on investment based on geographic region. Roof replacement, for example, has a higher return on investment in areas with bad weather. Central air conditioning has a higher return on investment in warm areas where it matters more. Remodeling Magazine has a report that breaks down return on investment for improvements by geographic region.
Square footage boosts home value
Depending on your area, adding square footage can indeed increase your home’s value. You do want to keep an eye on what your neighbors are doing, though, as you don’t want to add so much square footage that you price yourself out of the competition. If you are the largest home in your area, you may not see a return on the money you spent expanding, as home buyers looking in your area may not be looking for homes with that much square footage. A better strategy would be to be at the high end, but not an outlier.
In order to gauge how much of a return extra square footage will get you in your market, compare your home with recent sale prices for homes that sold in your area with the square footage you are considering expanding to.
Digging into the data
The National Association of Realtors published a report using 2017 data on what renovations are likely to return the most money. It also lists average price of the improvement, to give you a sense of the cost of some of these projects.
Here, I’ve compiled that data into a chart, sorting from highest return to lowest return.
From another source, below are statistics from the 2018 Remodeling Magazine National Survey. This table is for midrange renovations, and below we will look at luxury renovations.
Here, also from the 2018 Remodeling Magazine report, is a breakdown of return on investment for renovations in the luxury range.
All markets are not equal, however. If you are in a hot market, you will see your renovations pay off more. According to Remodeling Magazine, “In general, the hotter the market, the bigger the payback. In San Francisco, 21 of the 29 projects had cost-recouped values above 100%, and in San Jose it was the same for 16 projects.” You can look at your specific area here.
Energy saving improvements
Energy saving improvements can have a clear return on investment, even without considering how much they boost your home value, if you save more on your energy bills than you spend. EnergyStar has a helpful (and seemingly endless!) list of improvements you can make that result in direct energy savings.
There are also PACE energy loans available to finance energy improvements. If you are considering a PACE loan, read about the pros and cons here before you make a decision.
Few home improvements return 100% of the cost, unless you are in a hot market. It’s important to pay attention to your local market when deciding which home improvement projects will pay off more. Square footage is generally a good bet to add value, though not if you add so much that your home is an outlier in your market. Energy saving improvements can pay off simply in saving you money, and in some cases, boost home value also.
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