There is no single formula for calculating the return you can expect from a renovation. One of the best ways however is to order a certified home appraisal before starting work. This is a process in which an appraiser determines the fair market value of your home. These types of appraisals are usually only done when someone is buying or selling a home. It won’t be a perfect way to figure out where to best spend your budget, but it will help.
Another way would be to order what is called a “As-Completed Appraisals” . This is where the appraiser looks at your reno plans and your current value to help determine how much ROI you may plan to expect upon completion. These appraisals do come at a cost, though. They are common when applying for a renovation loan. The homeowner is trying to borrow based on the potential equity in the home “as completed.” The appraiser will look at sales comparisons in your neighborhood, as well as your plans to get an idea of value.
This process is an art, not a science, meaning no two are the same. Different appraisers may come to different conclusions about the same property. So, this would be one benefit of financing your reno with a renovation loan, because they rely on this type of appraisal. This ensures you know how much value to expect from your renovation. In other situations, where you’re not getting the “as-completed appraisal” all we can do is guess- and use that 70% rule to determine the expected ROI.
Long term vs. short term value is also a huge consideration when you’re planning a remodel. Projects that add functionality and space, like additions, or moderately upgraded appliances are value adding and will stand the test of time. These don’t rely on trends in design. These are the projects that add long term value.
For example, if you plan to add a bedroom and bathroom to your home, with the understanding that the size/finishes are not outside the norm for your neighborhood, this reno will be valuable to homeowners both now and in 30 years. On the contrary, other renovations, like kitchens, will add short term value, because in 15 years any aesthetic improvements you’ve made could be out of style. An example: An all white kitchen renovation could boost your home’s value in today’s market and for the next 5 years, but when you plan to sell in 15 years, this trend could have already peaked and be out of style. It could then be seen as a negative, out of date kitchen by home buyers.
Think about your mom’s country blue duck wallpaper in the 80’s. At one point, that was the epitome of style, now you’d struggle to sell without redoing those walls!
This further solidifies our advice of not making ROI your biggest deciding factor when it comes to kitchen and bathroom remodeling. Your style preferences now, may not be on trend in 20 years.
So, maybe now you’re asking, “Then what should be my motivation for remodeling?”
Our answer- quality of life! Make choices based on your family’s needs. Make your house feel like home and add things that your family needs to function in the space.
Renovations are a unique investment. They can improve your quality of life and add value at the same time. The stock market doesn’t do that. Your home is almost always appreciating in price, therefore it makes sense to invest in maintaining it. Try not to go overboard and keep things simple.
When you’re considering a renovation, ask yourself these questions:
- Is my renovation simply to stay on trend?
- Will the upgrades I plan to do stay within the boundaries of what is normal in my neighborhood?
- Is my renovation adding functionality and space?
- Am I choosing materials, appliances and finishes that are priced right?
- Will these renovations improve my quality of life?
- How long will I be here before I plan to sell?