How Much Are Pricey Home Upgrades Really Worth?

By Damian Davila on 3 October 2016 0 comments

"Real estate investing, even on a very small scale, remains a tried and true means of building an individual's cash flow and wealth," writes Robert Kiyosaki author of Rich Dad, Poor Dad. (See also: The 8 Classic Personal Finance Books You Must Read)

But like with any other type of investment, you need to know what you're doing, or you'll end up eating your shirt. For example, you may think that some high-end projects, such as adding a deck that offers a majestic view or doing an upscale bathroom remodel, may provide you a great return on your real estate investment. However, the evidence from the 2016 Remodeling Cost vs. Value report from the National Association of Realtors (NAR) shows the contrary.

By taking a look at the project costs in 102 U.S. real estate markets, the NAR report provides a comprehensive review of what features provide you the best bang for your real estate buck. Let's round up a handful of "features" that can really boost the cost of a home, but may not actually deliver a lot of value. And we'll look at the projects you should take on, instead.

1. Bathroom Addition

The idea of having an extra bathroom so that your family members don't have to sit around for others to get ready for the day may sound like a great idea. But adding a full 6-by-8-foot midrange bathroom to your home only recoups just under 60% of your total cost, on average. In 2016, the national average cost for a midrange bathroom addition was $42,333, but offers only $23,727 in actual value — in other words, a net loss. Even worse, the NAR reported that only one out of the 102 U.S. markets provided a 100% return on this project on that year.

Going "upscale" on a bathroom addition doesn't fare well either. In 2016, the national average resale value for an upscale bathroom addition was only 0.5% better than that for a midrange bathroom addition.

What to Do Instead: Keep it simple and midrange. A bathroom remodel provides a better resale value than an addition. A midrange bathroom addition and a midrange bathroom remodel recoup 56.2% and 65.7%, respectively. Doing an upscale bathroom remodel only improves the resale value by 1% over the one offered by an upscale bathroom addition. Also, the cost advantage of midrange bathroom remodel ($24,000) over an addition allows you to pay back any financing more quickly.

2. Composite Deck Addition

Enjoying a hot cup of coffee by a bonfire during the fall, or reading an intriguing novel while getting a tan during the summer out on your deck sounds like it's worth every penny. But, the financial math doesn't add up.

Adding a 16-by-20-foot deck using pressure-treated joists supported by 4x4 posts anchored to concrete piers would run you a national average between $16,798 to $37,943, depending on the scope of your project. The resale value of a composite deck addition would only recoup $10,819 to $21,877, according to national averages.

What to Do Instead: If you really want to have that deck, go with wood instead of composite. Adding a midrange deck made out of wood provides a resale value over 10% higher than that of composite.

3. Backup Power Generator

We all want to be prepared for disaster, but the addition of backup power generator runs at $12,712, according to national averages. Worse, this project only recouped an average of 59.4% of its cost in 2016.

What to Do Instead: Forget about backing up your power and focus on replacing your entry door. Replacing the entry door to your home is a good idea because it can improve the security and ability to withstand the elements (and zombies!) from your home. Additionally, the right door can enhance the look of your home. While the in 2016, the cost of a midrange entry door replacement recouped 91.1% of its cost, in past years this project has recouped up to 128.9% of its cost! In the 2015 edition of the NAR report, entry door replacement received the top rank nationally in terms of cost recouped (101.8%). That year' survey revealed that a new steel door was the least expensive project and provided the best payback out of all projects across the nation.

Additionally, eligible ENERGY STAR doors can qualify you for up to $500 in energy efficiency tax credits.

The Bottom Line: The Simpler the Project, the Bigger the Return

Currently in its tenth year, the 2016 NAR report indicates that "the simpler and lower-cost the project, the bigger its cost-value ratio."

In 2016, four out of the top five projects that ranked best for cost recouped had a total cost under $5,000. These costs estimates were made assuming that you hired a professional contractor to complete the projects. Regardless of your budget, you'd be better off tackling two or more affordable projects that recoup at least 90% of their value, than just one high-end one with a recoup value under 60%. If you have great DIY handyman or negotiation skills, you could improve your investment return even further. (See also: 4 Times You Should Splurge and Hire a Pro)

As you can see from these sample projects, replacements cost less than alternative home renovation projects, such as a kitchen or bathroom renovation, and provide the best bang for your buck. Another home renovation project that can be completed within three days and that provides a high return on investment is garage door replacement. In 2016, a midrange garage door replacement would recoup about 91.5% of its cost.

How are you improving the market value of your property?

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