"Big" Remodeling Pays Off Better . . . To A Point
It shouldn't be a surprise that remodeling projects increase a home's value. What's news is that homeowners who spend the most on remodeling get a higher rate of return on their investment, according to Harvard University's Joint Center for Housing Studies.
Rates Of Return
Results of the Center's recent study indicate that projects costing 20% or more of the home's initial value yielded an average home price appreciation of 23%. Homeowners who spent 10% to 20% of their home's value on remodeling saw a more modest price increase of 12%. Spending 5% to 10% of home value achieved a 7.5% price increase, an outlay of 2% to 5% earned a 6% increase, and spending 2% or less on remodeling improved home prices by 2.5%.
The remodeling industry has been booming for several years, fueled by steady home price appreciation in many areas of the country. As home values have increased, homeowners have been tapping their equity to finance remodeling projects, which in turn have further increased their homes' values. In addition, home improvements have promised a better return in recent years than many other investment options.
Larger projects--such as room additions and kitchen makeovers undertaken by upper-income homeowners--have helped push the remodeling industry to a record of more than $135 billion spent in 2002. Established baby boomers are choosing to remodel rather than move away from friends, relatives and work venues. Immigrants and 20-somethings have been taking advantage of low mortgage rates to buy starter homes, then improve them according to their tastes and needs.
If you are tempted to spend a lot improving your home in order to get the best return, be careful not to "over-improve." Real estate experts advise that the return on your remodeling investment is likely to be lower if your remodeled home exceeds the value of comparable properties in the area by more than 20%. (Give us a call to find out what your home would be worth after remodeling.)
Done well and wisely, your remodeling project could result in a more comfortable home to live in and a nice financial return when you sell. If, however, your remodeling project will take the value of your home well beyond that of neighborhood homes, you might be better off selling your current home and buying a new one with the amenities you want.