Written by: Corey Janoff
This blog post originally appeared on May 16, 2017 on our previous blog website, www.FinancialClarityBlog.com and has since been revised and updated.
It’s no coincidence that as the economy has recovered and with the rise in popularity of home improvement shows on HGTV and other networks, many people are undertaking home renovation projects. I have spoken to a number of people who are pouring money into renovating their existing homes, or upgrading a home shortly after they purchase it. Every time I hear someone say they plan to redo the kitchen or upgrade the master bathroom, I wonder to myself, “Does this make economic sense?”
So, I decided to do some light research (i.e., skim some articles on the internet), to see if the investment is worth the cost. Several articles I found indicate that most people don’t recoup their entire investment when they sell their home.
For example, according to this article on bankrate.com, the average kitchen remodel costs almost $21,000. For that cost, it improves the resale value by just under $17,000. In a recent podcast episode on selling a home, we asked real estate agent Rick McDowell for his input and he informed us a minor kitchen remodel recoups about 80% of the cost in resale value, while a major remodel only recoups 54% of the cost.
Home additions, such as adding another bathroom, bedroom, deck, etc., seem to provide the worst return on investment. Sellers ultimately spend about twice as much on the addition as they recoup when they sell the house.
The one home remodeling project I could find that seemed to deliver more resale value than the initial cost was insulating the attic. You can see a list of the best and worst home improvement projects from an economic standpoint, according to Realtor.com here.
I imagine these studies assume you sell the home shortly after the renovation. It would be much harder to track the value add of improvements over time. Which leads me to conclude the main reason we decide to make home improvements.
Why Do a Home Renovation?
Yes, when you plan to sell a home, it’s probably smart to slap on a fresh coat of paint, mow the lawn, and pull the weeds out of the flower beds. But for the bigger projects, if the resale value add doesn’t justify the expense in most cases, then why do we bother? Most people doing home renovations aren’t in the house flipping business, nor do they have their own TV show on HGTV. Most people are making home improvements because it makes us happy. It appeals to our emotions. Just the planning phases alone get us excited!
Why cook in a cramped kitchen on chipped counter tops when you could open up the kitchen, add an island and granite countertops? Wouldn’t you rather be able to share the master bathroom with your spouse by adding a double vanity, instead of taking turns brushing your teeth?
Why do some guys turn the basement into a man cave, with a recliner, wet-bar, and pool table? It’s not because it’s a well-known fact that a pool table and your life-size replica of the Stanley Cup trophy instantly add value to your home. Far from it! It’s because you want your home to be a home. A place where you feel comfortable and happy and want to spend time in.
Numbers, Numbers, Numbers
Financial planning and money is all so numbers driven. Rational beings will only make sound decisions that pencil out when you crunch the numbers. The problem is humans aren’t rational. Even if the home renovation doesn’t make sense from a financial perspective, if it makes you happy and improves your emotional health, then that should count for something.
Now, I’m not suggesting to throw caution to the wind and blow all of your money on home projects or other fun things that make you temporarily happy. Don’t liquidate your retirement savings to landscape your backyard. That would be dumb and increase your tax bill next April. But we shouldn’t only live life according to the numbers.
It’s prudent to make sure you invest for retirement and live within your means, so you can continue to have an enjoyable lifestyle for the rest of your life. Just be sure to have some fun along the way. Spend money on something stupid that brings joy to your life.
Money in and of itself doesn’t make us happy, but it enables us to do things that make us happy. Those things differ from person to person.
So if it doesn’t break the bank and you aren’t hurting yourself financially (like taking on high interest rate debt to cover the cost), then go ahead and renovate your home if it will make you happy.
But if you are considering a home renovation simply for the improved resale value, then it probably doesn’t make sense.