Home Improvements With the Biggest Investment Returns
By Teresa Mears
Even if you're not planning to sell your home anytime soon, it's an inevitable question when you consider remodeling: How much will this improvement add to the value of my home? Surprisingly, much of the time the answer is not as much value as it costs to actually make the improvement. But some home renovations bring you more bang for your buck.
The top-ranking home improvement? A new front door, which on average adds 96.6 percent of the amount you spent to the value to your home, according to Remodeling magazine's annual Cost vs. Value Report for 2014. But "it has to be the right front door," says Steven Aaron, owner of the Steve Aaron Realtor Group at Keller Williams Beverly Hills and one of the protagonists of the HGTV series "Selling LA." Keep in mind that sometimes painting the existing front door provides the same payoff.
%VIRTUAL-pullquote-Whether certain improvements will pay off varies not only regionally, but also neighborhood by neighborhood....%All 35 projects included in the Cost vs. Value report added more value this year than last year, and this is the second consecutive year of increases after several years of decline. Replacing old elements, such as doors, windows and siding, in general yielded a better financial return than bigger remodeling projects, such as additions. But real estate agents and remodelers say updated kitchens and baths still bring a significant payoff, especially at resale time.
The report found that kitchen projects yielded a higher return than bath projects, with a minor kitchen remodel adding 82.7 percent of the project's cost back to the home's value. Kitchens are important, Aaron says, because would-be buyers often overestimate how much they would cost to update.
"If you have a dated kitchen ... and a buyer walks into that kitchen, they're going to think that in order to redo that kitchen, they're going to have to spend $40,000 or $50,000," Aaron says.
But the average cost of a minor kitchen remodel -- new cabinet doors, appliances, countertops, sink, faucet, paint and hardware -- was $18,856 nationwide, according to the Cost vs. Value report. Savvy shoppers can do it for less than the buyer assumes.
But, like the front door, it's important to do the right kitchen remodel. Adding a $75,000 kitchen to a $100,000 house is unlikely to yield $75,000 in value, although it may make you a happy chef. As a general rule, look to spend about 25 percent of the home's value for a new kitchen and 12 percent to 15 percent for an updated bathroom, says David Pekel, president and CEO of Pekel Construction in Milwaukee and a master certified remodeler.
Putting an ultramodern kitchen into a 100-year-old Tudor home isn't smart, either. "Whatever your home improvement is ... I strongly discourage designing new spaces in a fashion that's incongruous with the rest of the house's architectural vernacular," Pekel says. "It doesn't really add value. It detracts."
Whether certain improvements will pay off varies not only regionally, but also neighborhood by neighborhood, based on who is going to live in the house. For example, a pool adds more value to homes in some Los Angeles neighborhoods than in others, Aaron says. In cities with colder climates, a pool may not add any value. (Pools are not included in the Cost vs. Value report.)
Renovations within the existing envelope of your home -- those that don't require you to build an addition or expand the roof and foundation -- often return more value than building extra rooms onto your home. For one thing, they're much cheaper.
Converting an attic into a bedroom ranked third of the 35 improvements in the Cost vs. Value report, returning 84.3 percent of the amount spent. Turning attics into usable space is a popular and profitable improvement in the Milwaukee area, where much of the housing is older, Pekel says.
Adding a powder room and then closing off a hall bathroom to make a bedroom suite is popular in Los Angeles, and it doesn't require adding to the home. But an addition can pay – especially the right addition. Aaron tells the story of an investor client who added a 500-square-foot family room off the kitchen of a 1,200-square-foot house in the Los Angeles area, opening the home to the yard. The cost was $20,000, but it added $100,000 to the value of the house, which sold for $850,000 instead of the projected $750,000. "It's a smart addition that's not that expensive," Aaron says.
Replacing windows with French doors that open to the backyard is another popular, and not very expensive, renovation project. "It makes the room feel bigger and gives you somewhere to go," Aaron says. "Suddenly your home just feels more spacious."
In the years before the real estate market crashed, additions were the most popular remodeling project, Pekel say, with family rooms, kitchens and master suites among the top choices. But in the current lending climate, it's easier to get a mortgage to buy a bigger house than it is to get a home equity line of credit to add to an existing home.
Among the home improvement projects Pekel is seeing these days, many focus on updating the envelopes of homes with new siding, windows and insulation. For people who plan to stay in their homes, investing in those projects, as well as in more energy-efficient heating and air conditioning systems and appliances, saves money all year.
He points out that resale value is one factor to consider in a remodeling project, but the value to you as an occupant matters as well. This is especially important if you plan to stay in the home for a long time.
"Remodeling from the perspective of looking at it from an investment strategy is a terrible model," Pekel says. "What we can't quantify is the value of lifestyle."
Here are the home renovations that Remodeling's Cost vs. Value study says will give you the biggest bang for your buck, as well as projects that generate the lowest return.
Renovations that bring the greatest percentage return on investment:
• Entry door replacement: 96.6 percent
• Deck addition (wood): 87.4 percent
• Attic bedroom: 84.3 percent
• Garage door replacement: 83.7 percent
• Minor kitchen remodel: 82.7 percent
Renovations that yield the smallest return:
• Home office remodel: 48.9 percent
• Sunroom addition: 51.7 percent
• Bathroom addition: 60.1 percent
• Backup power generation: 67.5 percent
• Master suite addition: 67.5 percent