According to a 2019 Remodeling Impact Report, Americans spend $400 billion yearly on renovations. There is no doubt that home improvements increase the value of your home. But did you know that not all have the same return on investment (ROI)? For example, a cost vs. value report of 2021 states that the renovations with the best returns were related to curb appeal. On the other hand, the projects with the lowest returns were related to living space. Home improvement ROI is an important factor when considering and choosing home improvement projects.
This article walks you through what home improvement ROI is, how it works, and what renovations add value to your home.
Is Home Remodeling a Good Investment?
Yes! Home remodeling is a pretty good venture, especially if you plan to sell your home soon. The home improvements with the best return on investment are related to curb appeal. It includes exterior remodeling, home décor changes, landscaping, or a door replacement.
In the same line, a minor remodel will pay out more than a high-end one. For example, a minor kitchen remodel has a better ROI than a major kitchen remodel.
However, it depends on what you plan to do with your home. If you plan on staying for five years or longer, you can go ahead with the look and upgrades you want.
What Is the Average Cost of Home Improvement?
The cost for home renovations varies depending on what you want to do and how big your home is. For example, for home exterior remodeling, the average cost ranges from $2,600 to $92,000. But the same is $3,300 – $120,000 for home décor changes.
Home improvement costs are calculated per square foot. For example, for home exterior remodeling, the average cost is $33.30. But home décor changes have an average of $27.20 per square foot.
Also, remember to include your commute time when calculating ROI! The extra travel time adds up, and it can be a significant factor in home value. Here are some of the factors that affect the cost of renovations:
Renovations often require permits, especially those involving electrical and plumbing work. Generally, contractors include the cost for permits in their contracts. However, if you are going the DIY route, you may have to obtain the permits yourself.
Construction Labor & Materials
The home improvement costs also include construction labor and materials. The average cost to hire a contractor depends on where you live and can be $20-$45 per hour. You can save some money by doing the work yourself, but it will cost in time! Also, the expense depends on the material you choose.
Time of the Year
The home improvement cost may vary depending on the time of the year. For example, renovations to the home’s exterior will be cheaper during winter. This is because there were fewer home exterior projects started at that time.
Increase in Material Price
Watch the prices of materials if you are doing a home improvement project. If you need something, buy and stock it when the prices are cheap.
Finally, your inconvenience during renovation also factors in when calculating the expenses. For example, tearing down things can be loud, dusty, and cause general inconvenience. The same goes with a kitchen remodel. Since the space will be inaccessible, you’ll be eating takeout in the meantime.
What Is Home Improvement ROI?
The ROI for home remodeling projects depends on your intent to a great degree. If you plan to sell your home soon, exterior remodeling is the way to go.
If you plan on staying for a long time, any home improvement will add some value. However, it is not much since homeowners tend to invest money only in renovations that will pay off.
What Are Some Home Improvement Costs that Can Be Deducted from Tax?
The cost of some improvements can be deducted from your taxes. Home improvements that have tax deductions are electrical system upgrades and energy-efficient projects. Home décor changes also bring in some tax benefits because of their direct impact on home value.
According to Budget Dumpster, the expenses related to these home remodeling projects are deductible up to $500 per year. However, it does not include all home décor costs. Instead, homeowners can claim the costs incurred by energy efficiency improvements.
In addition, home improvement costs can be deducted over a period if the project is expensive. If you plan to stay in your house for at least 7 years, then you can make a deduction. After that, you deduct up to $1,500 each year until it is paid off.
How Do You Calculate Home Improvement ROI?
ROI or return on investment is a measure of the profitability of an expense. It is generally expressed as a percentage, sometimes as a ratio.
ROI of home renovations = Amount spent/Total increase in home value.
For example, if you spend $15,000 on renovations and the home value increases by $20,000. The calculation goes as follows: 15/20 = 0.75 or 75%.
This indicates that a home remodeling project is worth roughly 75% of its original price. This is because it increased the property’s value by $20,000.
Home Improvements that Add the Most Value in 2021
Not all home improvements offer the same results. Some have a better ROI than others.
The home exterior remodeling has the most favorable ROI. The improvements with the highest return on investment are usually related to curb appeal. This includes exterior remodeling, home décor changes, landscaping, or even a new front door.
But, home interior renovations like an extra bathroom or kitchen do not add much value to your home. This is because homeowners invest money in renovations that will pay off for them.
So what home improvements give you the best ROI? Here are some home improvement projects that offer high ROI in addition to a good resale value:
Garage Door Replacement
Replacing the garage door has the highest ROI at 93.8%, as per the statistics. It will pay for itself, especially if you choose to reuse your motorized opener. Replace your garage doors with a four-section door and heavy-duty galvanized steel tracks.
A new garage door can improve your curb appeal to a vast degree. Moreover, it can also keep your home safe and increase energy efficiency. However, keep in mind that the new door should match the architecture of the whole house.
Electricity is something that homeowners cannot live without. Home electrical system upgrades are very important. They can make your home more efficient and less likely to start a fire.
With an ROI of 87%, it’s one of the most profitable projects you can undertake, as per home improvement experts. The high ROI is because of its long-term benefits for homeowners.
A few hundred dollars on a home electrical system upgrade will increase the resale value. It also improves energy efficiency to a large extent. You can recover your investment in only a few years with electrical upgrades.
Manufactured Stone Veneer
With an ROI of 92.1%, manufactured stone veneer is one of the much-desired remodeling projects. For the most part, this is due to its natural stone-like appearance. Apart from that, it is also cost-effective and doesn’t cost as much as a natural stone.
Stone veneer is easy to maintain and durable. Moreover, you can install it in a home without the need for professional help or extensive construction work. This saves you both time and money that would otherwise go into other smaller projects.
The stone increases the curb appeal and is water-resistant when used instead of sidings. Even better if you waterproof the surface beneath the stone.
Minor Kitchen Remodel
Another home improvement project that pays you back in a few years is the minor kitchen remodel. It can increase the value of your home by up to 20%.
A minor remodel may involve adding energy-efficient appliances and new countertops. Instead of replacing the cabinets, you can refinish the existing ones. A kitchen remodel can add more functionality and make the home more comfortable.
Kitchen home improvement costs about $30,000 – $50,000 on average. However, they can increase depending on the size and layout of your home.
Minor Bathroom Remodel
Two types of rooms sell a house: kitchen and bathroom. A bathroom remodel has great potential and also a median ROI of 60.1%. You do not need to renovate the whole master bath. But if you make some minor changes, it will make a big difference. For example, try converting the showerhead into a rain shower. It’s something potential buyers will enjoy.
Moreover, try updating the lighting to brighten things up. Also, a new or refinished vanity can help if you plan to sell your home shortly. These simple things can help the future owner feel right at home.
Fiber Cement Siding Replacement
Another home improvement that provides the best ROI is fiber cement siding replacement. The siding replacement has an average ROI of 69.4% as of 2021. And homeowners can recover their costs within a few years.
Putting the fiber cement siding on the exterior costs approximately $19,626. In return, you can see an increase in the value of $13,618. Fiber Cement mimics the look of wood without the need for extensive maintenance. Since it is not wood, it will not rot or warp over time.
Besides, fiber cement siding also increases your energy efficiency to a large extent. It is also pretty easy and doesn’t require much time to install. You can do it yourself if you have some basic home renovation skills. However, hiring a contractor will be more cost-effective in the long run.
Vinyl Siding Replacement
Vinyl siding is a popular choice for homes that enjoy extremes of climate conditions. Not only does it gives a fresh appearance to your home, but it is also economic. In addition, compared to others, it is durable and requires the least maintenance.
Moreover, it is easy to install and doesn’t take long for professionals to finish the job. Depending on how big your home is and what type of siding you want to be replaced with vinyl, it takes a day or two. Vinyl siding replacement costs $16,576 but pays you back with an average ROI of 68.3%. With that, you can expect $11,315 in cost recouped.
Vinyl windows replacement is another excellent idea for a home renovation. It has an ROI of 68.3% and costs about $19,385. The new windows also increase the value of your home by $13,297 in return.
Vinyl windows can save you money on energy bills due to their energy efficiency. As a result, they prevent heat and cold air from getting inside your home.
In addition, homebuyers tend to love the look of vinyl windows. They are also easier to clean and don’t require much maintenance, which is a plus for home improvement ROI.
Hardwood Flooring Replacement
Homes with hardwood floors do stand out from other homes on the market today. Adding hardwood flooring is one of the most profitable home improvements. It has an ROI of 106%, according to the National Association of Realtors.
Moreover, you can recover your initial costs within two years or less depending on the type and quality of the floor. The hardwood flooring replacement costs $4,700 and pays back with an average increase in home value of $5,000. This is something worth considering if you plan on selling quite soon.
A 2019 study found that remodeling could achieve a 64% revenue-making ROI. What is built into the basement determines whether the expense becomes worth it or not. For example, a family room with a home theater, laundry room, and home office adds to the resale value.
What this means is that your home will become more valuable due to its added square footage. Moreover, home buyers are willing to pay more for homes that have extra usable living space.
Refinishing the basement costs $46,900 but pays off with an average value increase of $30,000. The cost recouped will depend on the square footage.
Wood Deck Addition
Adding a new deck has also been famous among homeowners in recent times. Remodeling Magazine believes new wood decks are one of the best projects for ROI at 65.8%. These are an excellent addition to a home for resale, said a NAR report.
The average cost of a wood deck is $16,766. That figure adds up to $11,038 in reselling value to your home. It is also inexpensive when compared with composite. Moreover, wood decks add outdoor living space when installed.
On the other hand, adding a composite deck can cost you $22,426 with an ROI of 63.2%. In turn, the home value increases by $14,169, which is not bad. In addition, composite decking lasts long and requires low maintenance. This makes it the best choice for projects that will serve you for a long time. Projects like this are intended to serve you rather than make money in the future.
However, most homeowners prefer wood decks because of their traditional look and appeal.
How Do Home Improvements Impact Resale Value?
All renovations affect the resale value to varying extents. Home exterior remodeling has some of the highest returns, with an average increase in value at 98.15%, while home décor changes have an ROI of 40.54%.
The home improvements with the best ROI are related to aesthetic appeal and sound design. However, they do not have a direct impact on your home’s value. They only increase it secondhand because of their impact on buyer perception.
Additionally, remodels such as electrical system upgrades also have a positive impact on the asking price. The reason being, the upgraded wiring reflects in the appraisal, which adds a boost in value.
However, expensive cosmetic improvements like swimming pools don’t carry much weight in the resale value. Not everyone wants to spend money on the safety and maintenance of the pool.
How Do I Finance Home Improvements?
There are many ways to finance home improvements. You can take out a loan, get a HELOC, the second mortgage, or save up the money you need for your project over time.
An alternative option is using home equity loans, where most banks offer up to 80% of the home value as loan amount with competitive interest rates and repayment schedules.
Another way to finance renovations is through credit cards, but it comes with high interest rates so make sure you pay them off as soon as possible.
Home Improvement Loan
Home improvement loans require homeowners to have 20% of the total down payment and closing costs. The average interest rate for a home equity loan is about 18%. This means that it can be a great option if your credit score allows it and is pricey in the long run.
Cash-Out Mortgage Refinance
With a cash-out refinance, you can refinance the existing mortgage for a greater amount and get a lump sum in hand. Cash-Out Refinancing is an expensive option if you only need a relatively modest sum of cash out. It is not your best decision if you only need a relatively small amount of money.
FHA Title 1 Loans
Title 1 loans allow you to borrow up to $25,000 for a single-family home. FHA guarantees this financing for home repairs and improvements. Even applicants whose scores have a poor credit rating can apply. You don’t need home equity, and you can borrow $2500 a month for a multifamily house.
FHA 203(K) Loans
You can also borrow money to buy an affordable house or fix your house through the government FHA. The minimum loan amount is less than 3.5 percent. The house must be a primary residence, i.e., the renovation will never cover any “luxury.”.
State and Local Financing
You also have the possibility of participating in programs managed by local governments or states. Many of these require income requirements. In addition, it can help finance constructing the new house, improving their infrastructure through energy-efficient upgrades, adapting properties for disabled people, and other projects.
In other words, home improvement ROI depends on several factors. The general rule says that home improvements increase their value and pay off within a few years. However, it depends on their price and type. However, not all home remodeling projects are created equal.
Also, you have to consider all home improvement expenses and not only the costs. The expenses such as design fees and permit costs will also impact the average cost. It also pays to consult with a real estate agent to track the real estate market trends.
For those requiring financial assistance, there are various home improvement loans available. However, it pays to consider if the home improvements will add more value before applying for a loan. If the renovation doesn’t generate enough ROI, there’s no point in financing.
Pro Remodeling is a local, family-owned business established in Tucson in 1971 and is regarded as one of the most trusted, best run, and customer-friendly contractors that provide the best home remodeling Tucson has experienced. If you are interested in adding more value to your home, contact the experts at Pro Remodeling today.