4 Critical Economic Factors of Major Remodeling ROI
When a home approaches 20 - 30 years of age or greater, there are many of the major components that require replacement. During this same period an home owner will make some significant decisions regarding the length of time they will live in the home and how inclusive their home improvement investments will be. Do you just replace the product components like an oven or do you undertake a major kitchen renovation? These decisions are often driven by a matrix of factors including the cost of improvements and the anticipated return of the investment. For anyone who was gone through this process, they will tell you that it is a complicated equation effected by many variables. We will look at some of these variables and the impact they can have on the best renovation results.
Time
The time element of the decision matrix is the
most significant factor. Much like the time value of money the longer the time
you intend to remain in your home translates to a higher return on your
remodeling investment. This is due the appreciation of the home's value and
ever increasing construction and product cost over time.
Let's use an example of a $1,000,000
home market value, a new home addition of $125,000, assuming property value
appreciation of 4% and general cost index inflation of 2%. So if you commence a
renovation project that cost $125,000 with the intentions of living in your
home for 5 years, the net result of this investment could yield you $75,000
increase in home market value. This is exemplified by the increase in added
living area multiplied by the $/sf of the market value.
If we use the same example but reduce
the time element to 2 years, the result could very likely be different. A
straight increase of property value appreciation in 2 years represents $80,000,
but yields a net result of a negative $45,000.
Remodeling Project
Not all major remodeling projects are
the same. Nor will they have the same return on your investment. Although there
are widely published articles on various remodeling project returns on
investment, the actual returns have to do with the contribution of a quality
design and the construction improvement workmanship. The best example of this
is a kitchen renovation that has been redesigned and updated to reflect modern
consumer demand. With a well redesigned kitchen that has been remodeled with
quality products and outstanding craftsmanship will stop buyers in their tracks.
With the priority of most home buyers
being focused on kitchens and bathrooms, it pays to invest your remodeling
dollars where they will contribute the most in your return on investment. In
contrast, when an owner invest in a swimming pool or lavish landscaping
improvements, the property is indeed enhanced but the investment does not
translate to equal value of the investment over time. The truth of the matter
is that these types of improvements often do not increase the resale value of
the property when sold.
Location
The location of your home has an
important influence on the remodeling project return on investment.
Historically speaking the closer your home is to developing metro area of a
city, the greater the increase in the rate of the property value. In contrast
the further out your home is the city the slower the appreciation rate. The
metro area properties also tend to hold their values better in times of high
home inventory periods, when there are downward pressures on home values. In
addition, the average age of homes are greater in metro areas then suburban and
rural areas. This naturally warrants greater home improvement investments in
older homes to maintain their value and keep them from a stage of disrepair.
The geo location has a huge impact on
how the renovation investment translates to higher rates of returns. When your
home's value is increasing at annual rates of 3% - 6% annual, the investments
in meaningful renovations such as room additions and strategic updates will
transfer into generous contributions to your homes ultimate sales price.
Purpose
The motives and purpose of a project
will also have an impact on the ultimate value of the property. Doing your
homework on your neighborhoods immediate property value will assist you in
evaluating the short and long term financial impact of proposed remodeling
projects on your properties future value. If your motives are defined by making
your living space more attractive through furniture and decorator accessories,
most often this will not translate into greater property values. So if
recapturing your home renovation investment is a priority to you, careful
analysis and consideration should be exercised before you commit to your
project.
Older home's owners must compete with
newer home inventory when they sell their property. New home pricing are
expectedly higher than existing home inventory. The price difference is often a
result of the architectural and contemporary design distinctions of newly
constructed homes. As a rule the more home improvement repairs and updates
required by an older home the larger to price difference between new and older
homes.
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