Home Renovation: Weighing Utility vs Return on Investment.

April 24, 2012

Working Carrying Lumber on Stairs --- Image by © Corbis

“Should I Do This?”

Now that the economy is showing signs of sustained recovery and cash is flowing back into stock portfolios and bank accounts, homeowners are starting to reconsider those home renovation projects that were put into the deep freeze when the economy hit the skids a few years ago.    That new kitchen or master bedroom suite is closer to becoming a reality for some.  But as they contemplate which project to take on first, or which ones to do at all, the most common question that arises every time is:

Will we get our money back on this project when we sell the house?

Talk about the $64,000 question!    And I get asked that question all the time.  Now, there's quite a bit more that determines the value of a house beside new granite counter tops in the kitchen, or a adding a master bedroom suite.   As we have discovered the hard way,  events like a recession, a war, a credit crisis in Europe, a shortage of inventory, and Britney Spears becoming a judge on X-Factor all seem to have more sway on the value of our homes than whether you chose to adorn your new kitchen with Miele or Sub-Zero appliances.

But the real answer to the above question, assuming that you're going to actually live in this house and not flip it, is this:  You shouldn't really care.   Here's why…

Shelter First, Investment Second.

Generally speaking, any improvement that you do to a house is going to increase its value.   And the more utilitarian the improvement is, the more the value will increase.     But why shouldn't you be so hung up on whether you'll get every last penny out of your project when you sell the house?   Because your home is shelter first, and an investment second.

It's only been in the past 20 years when home prices skyrocketed so much that the focus of a home shifted from away from shelter and toward investment.  I know that my parent's generation never thought of their home as an investment.    But during the boom years when houses would seemingly appreciate by $100K overnight, that changed our focus on what purpose our homes serve.

The reality is this:  Your home is where you'll probably spend 2/3 (or more) of your entire life…it's the place where you'll raise your kids, and host your most memorable gatherings.  In our society, the roof over our head is essentially the center of our well-being.   So why not make it the best place it can be?   More important, why does that decision have to come with an ROI analysis?

Look at it another way — If we used ROI as our primary decision criteria, then why would anyone ever think of buying a new car?  Nothing depreciates faster than a new car.  Yet we buy millions of them every year…  Go figure.

Within Reason.

Now this doesn't mean you should catch the first plane over to Italy and spend $25,000 on chic marble to adorn the fireplace that you never use.  But if you're going to get much more enjoyment out of your house by adding a bedroom, or a pool, or a master suite, then go for it.   If the stars align properly a few years down the road, you'll probably get that money back…maybe a little more, maybe a little less.

But in the end, is that really what's most important?

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