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Home Improvements Are Not Investments

We’ve deluded ourselves into believing that our homes are good places to spend our money as a continued investment. We relate to it much like tucking money away in a high yielding CD for long-term growth173646500sm believing we have just made a meaningful contribution to our net worth. So a new kitchen, bath, pool, landscaping is like money in the bank; plus we get to enjoy it too! It sounds great – but there is a not-so-great side to home improvements you need to be aware of.

The reality is very few home improvements return their cost, let alone a return on the investment.

Look at the Numbers

To give you a better idea of what I’m talking about let’s look at some numbers. Below is a study for the Sacramento metro areas, identifying what a home will return for a variety of common improvements. This is essentially calculating what impact the improvement would have on the sale of the property over the unimproved feature.

Remodeling Costs vs. Value for the Sacramento Area (2014)

Project

Job Cost

Resale Value

Cost Recouped

Bathroom Remodel

$19,181

$15,178

79.1%

Minor Kitchen Remodel

$21,473

$20,856

97.1%

Roof Replacement

$21,083

$19,110

90.6%

Home Office Remodel

$32,109

$20,587

64.1%

                        Data Source: http://www.remodeling.hw.net/cost-vs-value/2014/pacific/sacramento-ca/

As many people say, you can’t argue with numbers. Often, people understand this concept of depreciation in other areas of life but never relate it to their homes. For example, you know how a car drops in value when you drive it off the lot? Same thing applies here, just not as bad. For instance, an entire bathroom remodel that costs $19,181 will immediately increase your home’s value by $15,178… that’s 79.1% of your investment back. From an investment standpoint, that’s what’s known in the financial community as a loss.

But, “we get to enjoy it” you say… yes, but while you’re enjoying your improvement it is losing its value. In 15 years, that new bathroom simply becomes an old bathroom and eventually needs to be remodeled again. And so the cycle continues.

The good news is that some improvements will grow in value over time, like adding a room, a garage, or items that change the home materially/physically. However, for the most part, a home improvement is a depreciating asset.

Improvements vs. Repairs

Now, let’s distinguish between an improvement and repair. You should always repair things that could lead to further damage – like a leaky roof. That doesn’t always mean a new roof. An old roof can be nursed along for many years. In fact, I suggest you make it last as long as possible, but judiciously watch for leaks or the possibility of other damage. Always take care of your home because, if not, that’s how you lose money.

People will often spend money on their home simply because they want to. They comfort themselves in thoughts that the expense is an investment, which soothes their rational side. But it’s not an investment – it is an expense.

Rather than that long term CD, it’s more like those 80,000-mile tires that you replace after 65,000 miles and they give you an $18 rebate for the unused portion. So when you sell in 5 years, you might get $4500 for that now ‘no longer new’ bathroom.

So What Do You Do?

Choose your upgrades wisely. Make upgrades because you have the money and want to live that way – not because you think it is a sound investment. And, when it comes to ‘improvements’, spend cautiously and deliberately on your home.

56 Comments to “Home Improvements Are Not Investments”

  1. A very good guide to investing into your home. The most important thing you get from investing in your home is security for you and your family. Great read, keep it up buddy!
    Jin Linh recently posted…Saving Money with the Solar Tax Credit ExtensionMy Profile

  2. Really true… Great tips…

    Thanks Regards

  3. Informative and helpful post. The thing new homeowners forget the most is security, things like changing locks, installing intruder alarms, CCTV ect
    centrum security systems provide great information about securing your home.
    centrum security systems recently posted…A Guide to Installing A Home Surveillance SystemMy Profile

  4. While not a straight 1-to-1 resale value, you need to consider how easy it is to sell your house after an investment in home improvement. If you can do enough improvements to create a bidding war you can create more value. If you are missing something, like a fence, it can be hard to sell a house to a family with pets and in some cases might be a necessary improvement just to get the house sold.
    Noco Fences recently posted…Top 4 Reasons to Add a Fence to Your Property in Fort CollinsMy Profile

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By Bill Joyce, Broker (916) 500-2492 Bill Joyce on Google+




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