There are almost no renovations that will return more than $1 per $1 spent. Add in the additional penalty for any time value of money and you're even more underwater. (It can help speed up a sale, but generally will not have a positive RoI.)
Renovate for yourself and your own use, not the next owner.
In my area, if I were to spend $50k renovating my home, the value would increase by approximately $0.
If I were to spend $300k renovating my home, the value would increase by approximately $100k.
The only real increase in home value comes from additions which add bedrooms. If I were to spend money converting an attic, a basement, or adding an add-on, I'd probably come out even at the sale.
And renovations are quickly depreciating assets. I'm much better off doing that right before a sale. A new dishwasher will be an old dishwasher before too long.
I blame the HGTV shows for this misconception that a house renovation has a positive investment return. They show things like “a $100,000 kitchen remodel leads to an increase in house value of $80,000, an 80% return!”, when of course the real return is -20%. That’s not even counting time-value, which may lower it to -40% or -50% depending how long you hold the house. When you factor in opportunity cost...even worse. The best home “renovation”, when it comes to investment, is to do nothing.
Yes but it's worth understanding that houses rarely sell for more than average in the area. An "overimproved" house is likely not going to recoup the money spent. Of course if the house is very dated or hasn't been kept up, simple updates like paint, carpet, new appliances, etc. can be inexpensive enough to be worth doing.
If you're renovating because you want to continue to live in and enjoy the house, it's more a personal question of whether spending the money will increase your happiness.
That's not the whole story, though. Sometimes you need to remodel just so you can sell your home, i.e. make it competitive with the neighborhood. We're a couple of months away from rehabbing our master bathroom because it's so bad that it would be hard to resell it in this market. So, I think you're looking at it from the wrong perspective. It's not a strictly calculable amount when you re-hab a home--part of the subjective monetary value is what a future owner doesn't have to do after making a purchase.
I think most people delude themselves that their big renovations added any incremental value to their home. Usually the cost was financed and thus even higher than the sticker price, all-in. Further, the holding periods are measured in a decade +/- often, so the general market moves contribute more to the sales price than whatever you'd done to the kitchen/bath.
On the margin, having a move-in ready home that's been renovated well enough recently enough, generically enough, ensures reasonable liquidity of being able to sell the home for a reasonable price reasonably quickly.
For many this means replacing some dated appliances, repainting, and strategic spending on a few items that may be out of style or more aged, like bathroom vanity or replacing a linoleum top.
Extravagant, expensive, specific renovations may actually detract because the general markets taste are not your taste and so you've either reduced the number of likely buyers, or half the universe of buyers are going to actually deduct value of your renovation because they may want to undo whatever you've done.
Spending $2k replacing a worn appliance or buying a $200 air fryer are two orders of magnitude off from the expenditure levels I am referring to.
Increased the value by $X? Oh heavens no, that's far too optimistic.
You see, one of the joys of being a homeowner is that you have the option of improving your house so it's better to live in...for you. That might mean granite countertops, or that shade of fuchsia you LOVE on the bathroom walls, or a hot and cold running Pepsi, or a built in movie theatre, or a library, or...well, whatever it is you, personally, like.
We can assume that - unless you screwed up or got ripped off - that you personally value whatever improvements you make at more than their cost. "Wow, the main hallway is a halfpipe so I can practice my skate moves! I'd have paid $50k for that, but it only cost me $30k to have it built! SCORE!"
But, human taste being what it is, the next guy probably doesn't value whatever you built as highly as you do. Pretty much everyone likes stuff like having a closet in every bedroom; that's why houses tend to have them. But not everyone really cares about having a mirrored ceiling in the kitchen (perfect for cake decoration!). The fact that every house doesn't have them is a good sign that most people value this "wonderful" feature as being less valuable than the cost to install it.
Which is why, as a general rule, and with a few very specific exceptions, any improvement you make will always add less than $X to the market value. There's a few areas where you might be able to break even or even gain on the deal. If there's a gaping hole in the lounge, fixing that is probably worth it. Sure the next owner could fix it too, but you're going to have a hard time selling it like that. If you have vintage 1970s shag carpets and avacado wallapper, this might also be a good candidate. (Although you might luck into finding a buyer who'll pay more for the nostalgia value, I guess...)
But everything else (and especially any remodelling of an otherwise perfectly functional kitchen or bathroom just to add nicer fittings, which is stupidly common mistake) is almost certainly going to lose you money if you're just looking to sell the house. If it costs $X, it will (almost) always add much less than $X to the market value.
500k or 500m in renovations will increase the value of the property. A car is worth 20% less the day you drive it off of the lot and keeps losing value. Having freezer space can save you thousands of dollars in food.
I thought house-flipping like this was reasonably popular in the US. Is it common for renovations to homes to increase the value by more than $250k (or $500k for married couples)? My guess would be no and even if some couple buys an actual fixer-upper that needs a lot of work, they aren’t going to next look for some kind of dilapidated mansion in need of hundreds of thousands of dollars of repairs. I’m pretty unconvinced that this specific tax difference has a big effect.
Don't forget the cost of improvements and remodeling for a home you own? Home owners will probably need to update at least the bathrooms and kitchens before they sell, which can be an investment of >$20k. Not to mention the costs of repair, which you don't take on in a rental...
One of those things that adds a ton of value for the right person, but for the wrong person is equally negative value (it takes up 64 square feet of yard space!). While most people won't really care. And so while it can add a lot of value to the right person, overall it is zero value. Even to the right person it won't be as much value as you would expect - unless they are putting a more than normal down on the house the bank will then value that at zero and thus not give them a loan for what that feature is worth.
Pools are the same thing - should be valuable to the right buyer, but in practice worth zero. Even the most valuable remodels - kitchens - often are worth less than not doing it at all because while it adds a lot of value to the house it doesn't add as much as they cost.
What people think isn't the same as reality. Yes, I've noticed lots of deluded Americans think a new kitchen or bathroom is an "investment", but it's really not: they never get remotely as much money as they paid when they sell the home.
My first inclination would be to base maintenance cost off cost of rebuilding (optionally overridable) -- in effect, you end up with a much lower percent of total value where you're basically paying for an expensive lot, and a much higher percent of total value in depressed markets (e.g. where you can get 100-year-old 7-bedroom for ~= national median home value).
This is a good point. What if one spends $20,000 fixing up a property, and that contributes to what is ultimately a $50,000 increase in appraisal value?
EDIT: There is an existing response from another comment thread:
>That's a great point! This is why we deduct any home improvement costs from the gross profit calculation. So, if you spent 10,000 fixing the pipes and the gross profit was originally 100,000, we would actually deduct that from the gross profit. So our 20% share would be on top of 90,000 and not 100,000.
I'd say over the course of the 8 years or so we had the setup, it saved us $1600 in homeowner's insurance premiums, and when we sold it helped us get maybe an extra $10k out of the sale price, so around $11600 recovered for around $55k spent total. By the numbers, it makes no sense to do this. Realistically by the numbers, it never makes sense to do anything to a house that is anything above the minimum legal requirements and what is currently trendy and en vogue with buyers. Another thing I did on that house that I liked but made no financial sense was to put in /very/ good windows all around (around $26k spent) which netted around $5k at sale.
All in, I spent around $90k in 12 years on the house, and the outcome was maybe $25k returned at sale. When you look at anything like that you should really consider how long you think you're going to stay there. I had intended to live in that house quite a lot longer, but life situations changed and I had to move out of state, so off to sale it went. Nonetheless, I don't regret any of the improvements I made because I got to live with those improvements and have a house that matched my needs/wants/desires. If I buy a house again (I'm currently renting), I'll probably have it custom built. There's simply no reason in my mind to put up with lowest-common-denominator mediocrity and normalcy in the highest cost thing you will likely ever purchase in your life, and the folks who do that to return a few higher percentage points of ROI at sale are treating themselves like they're a renter in a rental property, rather than treating themselves like a homeowner. A house isn't an investment, it's a place to live that you can do pretty much anything you want with it.
Renovate for yourself and your own use, not the next owner.
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