Updated: 9/30/2010 9:00 AM ET|
Remodeling? It's a waste of money
One of the big myths of homeownership is that upgrades are investments. In reality, renovating is consumption spending. But if you want to remodel anyway, do it right.
There could be one upside to the real-estate implosion.
Plunging prices finally could shatter our national delusion that home improvements are somehow an "investment" in our homes.
Think about it:
- With a real investment, you commit your money and hope to make some kind of profit.
- With remodeling, you're all but guaranteed a loss.
Even at the real-estate market's peak, most remodeling projects didn't pay for themselves.
Homeowners typically recouped an average 86.6% of their costs, according to Remodeling magazine's 2005 Cost vs. Value report -- and that's only if homeowners sold within a year of finishing the work.
Wait any longer, and your return will be less. That's because home-improvement projects start to get dated as soon as you finish them. Today's stainless steel is tomorrow's harvest gold, in other words.
Ah, that stainless-steel debt
These days, the average return is just 67.3% of what you pay. No improvement came close to paying for itself in 2008. Even projects with the best payoffs, such as new siding and minor kitchen remodels, typically resulted in a significant loss.
|Remodeling costs recouped, by project and year|
|Upscale siding replacement||103.6%||86.7%|
|Bathroom remodel (midrange)||102.2%||63.5%|
|Minor kitchen remodel||98.5%||79.5%|
|Major kitchen remodel (midrange)||91.0%||76.0%|
|Major kitchen remodel (upscale)||84.8%||70.7%|
|Master suite addition (midrange)||82.4%||66.0%|
|Source: Remodeling magazine|
The home-improvement-as-investment myth, combined with easy credit, fueled an awful lot of irresponsible spending in the past few years. People thought it was OK to tap their home equity so they could ape the fancy kitchens and bathrooms on HGTV, little realizing they were throwing away their wealth.
This is not to say you should never remodel your home. Appliances and surfaces wear out over time. You might want to improve an inefficient layout. Or perhaps the home's previous owners had awful taste. (One of my relatives, a serial remodeler, says most of what she does is tear out the "improvements" of past owners.)
Also, it might make more sense to remodel than to sell and buy another home. Swapping homes is really burning money, as you lose about 10% of your current house's value to real-estate commissions, selling expenses and moving costs. If your home update would cost less than 10% of your home's value, or if you really love your current neighborhood, the improvement project might be worthwhile.
But you should view home improvements for what they are: consumption spending, not investing.
Remodel for the long haul
Ideally, you should pay cash for consumption. The only time it makes sense to borrow money is when you're buying an asset that stands a chance of gaining value over time.
Of course, the right project, carefully chosen and executed, can add some value to your house. If you plan to live in it for many years, you could consider financing 50% of the cost of any major improvements.
The 50% limit is just a rule of thumb. Because most projects are unlikely to recoup more than two-thirds of their costs and some will return less, it's smart to be conservative by saying only half the cost of your project will increase your home's value and thus can be financed.
But if you're going to finance any part of the cost, make sure your improvement really does add value. That means you should:
- Beware any upgrade that makes your house bigger or fancier than most others in your neighborhood, as such remodels are unlikely to add much value.
- Be cautious about adding pools or spas, as they repel as many buyers as they attract in most markets (because of the hassle or because of the drowning risk with young children).
- Aim to please the crowd rather than indulging your personal tastes. Bold statements like brightly colored appliances won't be a hit with many buyers.
What if you can't finance the project you want, either because your credit or your home equity is shot? Then it's time to start saving cash and considering alternatives.
Among the possibilities:
- Can you refurbish rather than remove? Refinishing or refacing cabinets is usually less expensive than replacing them. Reglazing tubs and sinks can extend their lives and save you thousands compared with a gut remodel.
- Can you rethink how you use space? Adding square footage may seem like a logical way to deal with a space crunch. But maybe you just need to ditch some clutter or re-purpose a room. Never use your formal dining room? Maybe it could be your office or a guest bedroom instead.
- What can you do with a little paint? Paint is inexpensive and relatively easy to apply, and can dramatically transform the look of a room.
When a little remodeling pays off
Finally, if you're trying to sell your home, you clearly shouldn't sink money into a major remodel. But there are some low-cost fixes that real-estate agents typically recommend as likely to return far more than they cost. Such as:
- Lighten and brighten. Wash windows, remove heavy curtains, trim back branches and bushes that cover windows (free to do it yourself, $100 to $300 to hire window washers).
- Declutter. Pack up at least a third of your belongings and store them ($200 to $300 a month for off-site storage).
- Deep-clean. Scour your house from top to bottom ($200 to $300 for professionals, basically free if you do it yourself).
- Spruce up landscaping. Trim bushes and hedges, plant flowers, renew mulch ($300 to $400 for professionals, free if you do it yourself).
- Staging. Rearrange furniture and décor to highlight positives and downplay negatives (costs can range from free, if you pick up a home-staging book at the library, to $500 and up for professional help).
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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