Spaces Blog

To Improve or Not Improve: Your True ROI on Home Projects

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Part of the fun of owning your home is the opportunity to make it uniquely yours. Making upgrades to your home can be a great way to change how the home looks and feels and also a path to increasing its value. It can be tough, however, deciding which job to tackle and how to navigate the endless choices available to you within any project.

I recently had a great conversation about exactly this topic with one of my clients who called for some help deciding which direction to go with the outdoor space they’re planning to create in their backyard. Their choice was between adding a deck and installing a paver patio and they were curious whether one option would produce a better return on their investment over the other.

The amount of value a project will add to a home is a common consideration for homeowners who understand that the money they’re spending is being “invested” into their home.

Since real estate is typically one of the largest single assets most of us will own, giving some consideration to how the money you invest into it will impact the home’s value in the future is definitely a great place to start.

The catch? Determining the true market value of any upgrade is far from hard science. Luckily there are few resources that can be helpful. One such resource is an annual report published by Remodeling Magazine which compares the average costs of different common projects with their anticipated effect on the home’s value. The current report for the Denver Metro Area was published recently and you can download it here. It covers the most common home projects and provides a benchmark for the average cost of each project as well as its estimated market value return.

Using this information, adjusted slightly based on my recent experience in the Erie market, we were able to determine a relatively safe estimate for what we believe a deck or patio will add to their home. My clients had already done some work gathering bids and were excited thinking about enjoying their new outdoor space. Unfortunately, the cost of the project they had envisioned meant they were looking at just under a 40% return on their investment which was quite a bit lower than they were hoping for.

They had a decision to make: drastically cut back on their plans for their backyard or spend the extra 60% with the knowledge that it wouldn’t be reflected in the value of their home.

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It’s exactly this type of decision which has thrown many a home improvement project into a holding pattern of uncertainty. Do you compromise on your vision for the project? If so, by how much and does it still make sense to do it? For some people the financial analysis alone may be enough information to make their decision however, the reality is that most of the ideas people have for home upgrades tend to originate in their desire to make their home more enjoyable to live in. Try as we might, the emotional risk or benefit of a project is not something we can count, calculate, or assume is the same from one person the next. This means it’s often overlooked or dismissed entirely yet it’s exactly this emotional component that will get us headed in the right direction again if we know how to account for it.

Just to be clear… I’m definitely not advocating making purely emotional decisions when it comes to this stuff. We all known how that usually turns out! I’ve seen plenty of “upgrades” which are so taste specific to the person that did them, that they not only fail to add value, in many cases they actually become a detriment to the property’s marketability. The real goal is to find a balance between spending your money wisely in the eyes of the market while improving how you personally experience your home on a daily basis.

My clients knew they would enjoy their patio but they weren’t sure what to do with the fact that a majority of the project cost wouldn’t translate market value.

My advice to them was to consider how long they planned to be in the home and whether the results of the project would improve their living experience enough, during that time, to justify spending the money they wouldn’t immediately recover.

In other words, I asked them to weigh the portion of the project cost that wouldn’t see an immediate return against the emotional benefit of the project within the context of how long they planned to be in the home to enjoy their new patio.

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We changed the question they were trying to answer from “Does it make sense to spend $X more than I’ll recover” to something far more inclusive of everything they were trying to account for: “Will the project provide enough enjoyment over the next 5 years to justify spending the money I won’t recover through the market.”

This is not only a conservative way to evaluate your home projects, it’s one that allows you to understand which part of the investment benefits your asset and which part is for your own enjoyment. It’s the true picture of your total return on investment and with any luck, something that you’ll find helpful as you pursue your next home renovation adventure. Good luck!