Think Home Renovations Make Money? Think Again

home renovationsThe boon of real estate reality TV and yes, Pinterest, has a lot of homeowners wondering if they should pick up a sledgehammer and renovate. Or spend even more money and hire it done. Either way, renovating your home is a big decision, almost as big a decision as deciding to sell and buy another house instead. Truth is, the two choices are inextricably linked.

Let me explain.

Increasingly we live in a consumer culture. An historically low cost of borrowing combined with 24-7 access to what’s new and fabulous in any market, means home owners are demanding more and more value (perceived or real) from their primary residence. In turn, home owners get the itch to move about every 4 years.

Given our propensity to be less satisfied with our homes for shorter and shorter time frames, we have to temper our lust for the next shiny real estate thing-a-ma-jig with financial prudence  That is, if you choose to remodel, renovate or even just change paint and carpet, you *must* decide if you’re investing in your bank account … or your lifestyle. Because there is a big difference. Fundamentally, there are two ways to look at it:

  1. Renovating for Returns: renovating your primary residence is not always a money-making proposition. Unless you bought the home for less than market value AND you can do a quality reno on the cheap (got lots of sweat equity to spare?), you may not earn a profit. That said, a strategic renovation can make a home more competitive with others for sale in the neighborhood. The trick is to only do those renos that will add value, rather than doing the house up to the nines in a location where no one will pay for that anyway.
  2. Renovating for Life: if you’re that rare breed who wants to stay in the same home for a very long time, than renovating can be a great investment. Not so much in your bottom line but in your long term enjoyment of the home. It’s still important to be strategic here. Life moves fast. You don’t want to sink everything you have into renovations only to experience a sudden life change that forces you to sell your home quickly–and potentially at a loss.

So why renovate if you won’t make a return?

If you’re planning to sell your home, have your REALTOR® run some comparables on other houses in your neighborhood. If your home “shows well” versus the competition, renovating may not be a good use of your money. On the other hand, if your home shows poorly by comparison, you may need to consider a few judicious upgrades or repairs in order to compete. Or, accept the fact that your home will sell at a “discount.” Buyers are smart, and they will quickly assess whether or not they’ll need to renovate after they purchase a property.

The takeaway lesson: never assume you’ll make money on a reno! The only way to project potential returns is to do your homework. Know your market. Understand the real costs–and risks–involved. All’s fair in love, war and real estate.