RENOFI: WHICH RENOVATIONS HAVE THE BEST RETURN ON INVESTMENT?
No matter what the motivation for your home renovation may be, you’ll want to know that your money is well spent. These are the home improvements that provide the best return on investment (ROI) to increase your home’s value.
On average, home renovations provide a 70% ROI.
Home renovations are one of the only investments that can improve the quality of life in your living space and increase the value of your home for the future.
The home improvements with the best ROI are projects that add functional space and square footage. Common examples are finishing basements, addition projects that add bedrooms/bathrooms, and new kitchens.
Home improvements that don’t add value are: luxury upgrades, aesthetic-only improvements, or out-of-the-norm projects for your homes in your neighborhood.
What is the ROI of a Home Renovation?
The ROI from a home renovation, depends on several factors:
Real estate market
However, most home improvements will not give you a 100% return on investment. While HGTV shows like Fix it or Flip it can make it seem like renovations are a great way to make money, that’s not the reality for the majority of home remodeling.
The rule of thumb that we share with homeowners is that you can expect a 70% ROI, on average, with home renovation projects.
If you’re looking for a way to invest your money and turn good profit, any financial expert worth their salt will not advise renovating as the way to do it. There are many other routes to invest your money, like putting money into the S&P 500, for example, that will give you a better return than a home renovation.
The reason why ROI is such a big factor in home renovations is that remodeling is the only method of investing where you get two means of value: you can get the ROI, and the greatly improved quality of life with a new space in your home.
For example, when you purchase a car and get repairs, you’re spending money on a depreciating asset. You’re putting money into your car and you won’t get back a single dollar.
When you purchase and renovate a home, you’re putting work into an appreciating asset - and chances are some of that money will stay with you! But there are still better ways to invest if that’s your number one priority.
So while ROI is exciting and important, it should not be the end-all-be-all of your project.
With that said, there are some insights we can provide based on experience in the renovation world, as well as remodeling research.
What Home Improvements Give the Best Return?
‘Type of project’ is one of the biggest factors in determining your renovation’s ROI. While obviously the other factors like timing, market and location will make a difference too, there are some common projects that generally provide a better ROI than others.
In general, projects that add functional space and square footage add the most value.
But let’s break that down even further:
1. Remodeling Kitchen & Bathrooms
As the two most utilized spaces in a home, investing in these rooms makes sense for both ROI and quality of life.
In some of the hottest housing markets, that means a return of 100% or more of the renovation costs.
These spaces are functional, filled with appliances and a necessary piece of every home - which means that they’re useful for any future buyer, no matter what.
However, this high ROI does not ring true if you’re completing a renovation that is purely aesthetic, using luxury materials and finishes, or creating a kitchen that’s far outside the norms for your neighborhood.
If you stick to a moderate kitchen or bathroom renovation, and your home actually needs an update, you can get a great ROI.
2. Finishing the Basement
High-income buyers value a finished basement, according to a study by NAHB.
On average, finishing this space will provide 70% ROI, meaning you can increase your property value by $700 for every $1,000 you spend.
With some drywall, flooring, and paint, this space offers more heated square footage, which can bump a home into a different price bracket.
Adding functional space to your home is always a surefire way to get a good ROI when you’re doing renovations, and more homeowners in high-income areas expect basements to be functional, livable areas.
3. Upgrading the Curb Appeal
In addition to enhancing the beauty of your property, certain upgrades also help improve your home’s efficiency and security.
Overall, projects that involve exterior improvements - from new windows, roofing, and siding to painting and landscape maintenance - can result in 80% ROI (see the table below).
One reason for this is that “curb appeal” is the first thing home buyers notice when they see a property - even if they don’t go inside.
So, a general rule of thumb for top ROI projects: adding more functionality and square footage will add value.
What Home Improvements Give the Worst Return?
Generally, any home improvements that are purely aesthetic and outside of the norm for your neighborhood will give you a worse than average ROI.
Luxury, entertainment, and aesthetic upgrades
Luxury entertainment upgrades probably won’t give you a great ROI because they’re not necessary for all future homebuyers, and they’re also heavily based on personal preference.
What do we mean by this?
Renovations with unusually expensive materials
Luxury or upscale kitchen/bathroom designs
Backyard sports courts
Other highly specialized spaces, like wine cellars or home movie theatres
The only exception is if you live in an extremely high-income area. Then it’s possible that some of these spaces will be expected or common for homes and the ROI won’t be as low.
However, if you live in a low-income or medium-income area, these spaces will provide little to no ROI, because future home buyers will not be willing to pay for them.
A general rule of thumb for bottom ROI projects: purely aesthetic or entertainment-based upgrades with no extra square footage will not add value.
For example, if you’re redoing your kitchen and picking out luxury materials, finishes and appliances - there’s a good chance that the person purchasing your home in the future may not like these choices more than their more moderately-priced equivalents.
Renovation Return on Investment Chart 2021
Another factor that impacts ROI with renovations is timing. Depending on the month or year, certain renovations can provide more value than others.
For example, after the pandemic, more homeowners value functional outdoor spaces - like backyards, porches, decks and patios - because of the safety and distance they offer when people are sick.
According to Remodeling Magazine, this is the average ROI for these 22 common renovation projects in 2021:
As you can see, outdoor improvements that are part of curb appeal make the list, as well as kitchen and bath remodels. But upscale remodels in general provide a worse return on value.
How Do You Calculate the ROI on Home Renovations?
There is no tried-and-true mathematical formula for calculating the ROI for home improvements. And the only official way to calculate home value is an appraisal, which is a process where a real estate appraiser determines the fair market value of a home.
This is usually only done when you’re buying and selling a home, so it might be tough to correlate the calculated value with a renovation project to see how home improvements may have impacted the value.
However, there is a unique type of appraisal called an “as-completed appraisal” where an appraiser will look at your renovation plans and your current home value and determine how much value they will add upon completion.
As-completed appraisals cost money, and are normally only completed if part of the process for applying for a “renovation loan,” where the borrowing power is based on the equity of the home “as-completed.”
For this unique type of appraisal, an inspector will look at sales comparisons in your neighborhood, as well as your current home’s specs and your renovation plans.
But this process is an art not a science, and two different appraisers could come to different conclusions on the same house.
One benefit of financing a renovation with a renovation loan, which relies on this type of appraisal, is that you can be sure exactly how much value you’re getting from a renovation.
In other cases where you’re not getting an “as-completed appraisal” - all you can do is guess - or use our 70% rule of thumb to determine your project’s ROI.
Short term value vs. long-term value
One important thing to note is short-term value vs. long-term value when thinking about ROI.
Projects that are adding functional space and square footage - like additions, finishing the basement, or making moderate upgrades to appliances - are value-adds that will stand the test of time, because they do not rely on design trends.
These types of projects add “long-term value.” For example, if you’re adding a bed and a bath to your home (and this addition won’t take it outside of the norm for the neighborhood), this renovation will be useful to homeowners now and in 50 years.
But other renovations, like new kitchens, will add “short-term value,” because in 20 years any aesthetic improvements made could be out of style.
For example, giving your kitchen a farmhouse, all-white style renovation could greatly boost your home’s value in a hot market within the next 5-10 years.
But if you’re not planning on selling for another 20 years - this design style could be seen as a negative, and out of date, by homebuyers. Thus - the value of this upgrade only holds up for so long. Think about your mom’s pink bathroom from the 80s. At one point it was the peak of style. Now, you’d struggle to sell that without re-doing it.
This is why we don’t recommend making ROI your biggest motivator when it comes to kitchen and bathroom renovations - because your style preferences might not be “in” in thirty years.
You should make your quality of life your top motivator for your remodel, so you can make choices based on your family’s needs when it comes to renovation style.
Just because an open floor plan might not be the hottest new layout, that doesn’t mean it won’t be awesome now for you and your family.
Is Renovating a Good Investment?
Any financial advisor will tell you that there are a lot of smarter and easier places to invest your money and get a better return. But renovating your home is a really unique investment because it kills two birds with one stone: it improves your quality of life, and it adds value at the same time.
Your home is an appreciating asset - and therefore it makes sense to put money into it over time to keep it in good condition, especially toward safety hazards, or broken/non-functioning parts.
But - renovation, solely as a means to add value, does not make sense and isn’t necessary unless you’re fixing and flipping.
If you’re considering renovation outside of adding value though, when you factor in 70-90 cents on the dollar in ROI AND a major improvement in quality of life? It’s genius.
Here are some questions to ask yourself as you’re considering a renovation:
Is my renovation plan really “trendy”?
Will these upgrades stay within the bounds of what is “normal” in my neighborhood?
Is my renovation adding square footage?
Is my renovation making my house more functional?
Am I choosing materials, appliances and finishes that are well-priced?
Is the main motivator behind this renovation my own quality of life?
How long do I plan to stay in this house before moving?