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For years I was under the impression that renovating a home was an investment. However, when I look up return on investment for typical home renovation projects, it appears that even the most high-value renovations (kitchens, bathrooms) seem to return only 80% at best of the investment. Is home renovation ever a good investment or is it simply consumption spending?

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Does investing in one's happiness fit into your question, or are you just asking about financial gain? –  MrChrister Apr 12 '10 at 20:03
    
@MrChrister Just financial gain in this case - whether or not one can ever plan on recouping the cost of a renovation. –  cabbagecalculator Apr 12 '10 at 22:56
    
I would love to see an answer to this question that referenced real data on this subject. The problem I've found is that finding reliable data on the subject is very difficult. –  glenviewjeff Sep 19 at 12:42

4 Answers 4

up vote 13 down vote accepted

In general, no, not in a strict monetary sense. (As @MrChrister noted in a comment.)

The primary exception to this, for me, would be in the case of a DIY renovation and a house-flip.

Given an outdated house in a good neighbourhood, and spending a reasonable amount on a selected set of renovations could make the house saleable to a different target audience, which might be willing to pay more than the dollar cost (including your labour) of the renovations themselves.

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@sdg Good point about the DIY. Labor is expensive, and if you can get that money going to your own pocket it can be valuable. Obviously you have to still maintain quality though. –  C. Ross Apr 13 '10 at 13:15
    
"Ever" is a strong word. But generally not, no. –  fennec Apr 16 '10 at 17:54
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Oh. The other thing that can make a renovation of some sort make sense is if it improves the place's efficiency (think "insulation" and less drafty windows) and reduces other expenditures. –  fennec Dec 17 '10 at 15:43
    
Efficiency: agreed. Solar, for example, can turn a net profit. But mostly, renovation pays in making the place more comfortable to live in, unless you really can put "sweat equity" into it ... and then you have to ask what your time is worth vs enjoyment of the project as such. –  keshlam Sep 21 at 5:08

The accepted answer here is astounding to me. Saying that renovation is generally a bad investment is insane.

Appropriate capital investments in a property add to the value of the property if done right, period. "Appropriate" is the key word -- high-end features in a starter home do not add monetary value.

While you don't get a dollar for dollar return for the money invested in a particular project, you also need to consider the opportunity cost of not doing the work. That aging kitchen, furnace or those ancient windows have a real, measurable impact on the cost of your home. You need to balance the cost of renovation against the loss of value due to the aging out of various parts of the house.

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Don't confuse renovation with maintenance. I think of renovation as being chaning and updating a building, like adding a room. New windows and appliances is simply maintenance in my opinion. It won't add value, but makes the cost of operating a home lower. –  MrChrister Dec 16 '10 at 0:57
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True, but its a grey area. The values of kitchens and bathrooms are largely style based... the "dream kitchen" of the 80s is tacky today. Is replacing a roof maintenance or renovation? People argue it either way -- it's a capital improvement that you may not recoup. –  duffbeer703 Dec 16 '10 at 17:15
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While I agree for the most part with this answer, in the investment community anything that is less than a "dollar for dollar return" is a negative ROI and thus not a good investment. The exception of course is if you can't sell the house at all without the renovations; that's the opportunity cost. –  Aaronaught Dec 17 '10 at 15:41
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@Aaronaught: Not necessarily... if you do a $10k kitchen upgrade and recover 80% of the cost in the selling price of the house, you're left with $2k. But the calculation isn't that simple. That upgrade will likely help your house sell more quickly... if you sell your home in 30 days vs. 90, you may save thousands in interest. Or you may not have to spend money to live in a hotel, etc. It depends on your circumstances, but isn't a simple calculation! –  duffbeer703 Dec 17 '10 at 20:58
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Fair enough, it's not necessarily a "yes or no" with respect to selling, it's really a function of time, with the worst-case scenario being "never". But unless you've actually attempted to calculate that, unless you can prove or at least imply a positive ROI, then it's still not a "good" investment. –  Aaronaught Dec 17 '10 at 22:34

In a rising housing market it's possible to make real returns. I once rented a house to someone who bought houses in need of renovation, did them up, lived in them the required time to comply with UK tax laws and then sold them on. It was his sole occupation and he was doing very well; he never missed a rental payment to me and his children were at a very expensive private school.

He was part of a group that did the same. Although he never did quite as well himself, I recall him proudly telling me that one member made over £250,000 profit in a single transaction, that's after subtracting the renovation costs.

However, all that occured a good 8 years ago when the housing market was very boyant. I expect the story for this group to be different today but I still think that one can at least break even, if not make a small profit, by updating a kitchen that's really run down and putting off buyers.

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Interesting story, I'm +1'ing because I enjoyed reading it. Thanks. –  ChrisInEdmonton Aug 9 '11 at 13:37

Conventional wisdom seems to be that renovating homes generally doesn't improve the value more than the cost of doing so. On the other hand, clearly some are able to make a profit from purchasing, renovating, and flipping homes.

Remodeling magazine publishes an annual cost vs. value report for 101 US cities. I'm not sure how reliable this data is, especially given that this magazine is representing the remodeling industry, but at least it's a start.

The increase in value after renovations is likely a market-specific condition that can change over time and vary by market location. It seems apparent that if the cost of home renovation labor and materials is low vs. the price demanded by real estate, it would encourage renovation and new home building and indicate that renovation is likely a good investment.

Of course, then there are the usual obvious caveats: don't add a $100k kitchen to a $200k home, yada yada yada.

There's a good brochure by the Appraisal Institute that gives some good general hints for homeowners considering renovations. Probably the most reliable way you can get an estimate of the expected increase in home value prior to actually performing renovations is to either apply for a home renovation loan, or hire a certified appraiser yourself. He or she can appraise the present value of your home and then look at plans as well as a contractor's proposal and value the expected value of the home once renovations are completed.

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