Reader Request: Remodeling with an Eye on ROI

Recently, a reader submitted the following questions to us: With regards to remodeling a home, (1) which rooms/remodel projects have the greatest return on investment, AND (2) how much should a homeowner spend on a remodel? Below we examine these wonderful questions and offer some guidance.

“Return on Investment”

Return on Investment (“ROI”) is the measurement of the benefit of a certain investment versus the cost of that investment. It is calculated by dividing the benefit (current value of the investment – the cost of the investment) by the cost of the investment, resulting in a percentage. For the purposes of our discussion today, we will just be looking at the ROI of different home improvements; however, it is important to note that this calculation is widely used in many different contexts (from day-to-day decisions to large expenditures) and used across many industries and disciplines. Simply put, ROI is an extremely useful calculation that can help you determine if something is worth the time, money, etc. It should be noted, however, that ROI is just one of many measurements available to you in deciding whether to make a certain improvement or not. There is also a great deal of intrinsic value to be found in improvements that improve the quality of your life or that allow you to better enjoy and use your home. So, while ROI should be considered when considering a remodel, do not forget that the most important thing is to make sure that the changes you make to your home serve your own personal goals!

Which home improvements have the greatest ROI?

Now that we have discussed what ROI is and how it is calculated, let us apply it to our favorite topic – real estate! There are many contexts in real estate in which an ROI calculation is useful, such as determining whether buying a specific property would be a good investment or determining what improvements will give you the greatest ROI. The former is a wonderful topic that we will be sure to explore for you further in a later post, but today we will be looking at the latter.

Adding a deck not only creates a great space for outdoor seating and dining, but it also adds value to your home.

According to a Forbes article published last year, which cited a report published in Remodeling magazine, the following exterior home improvements have the greatest ROI: adding a manufactured stone veneer to your home, installing a new garage door, replacing the siding of your home (fiber cement/vinyl), replacing your old windows for new windows (vinyl/wood), adding a deck (wood/composite), replacing your entry door, and replacing your roof (asphalt shingles).

While a brand new kitchen can really update a space, the ROI on a minor kitchen remodel is much greater.

Inside, the highest ROI comes from improvements to bathrooms and kitchens. According to a Washington Post article from earlier this year that analyzed results from multiple studies looking at the ROI of various home improvements, minor kitchen remodels had the greatest ROI for any interior improvement. A minor kitchen remodel, such as updating countertops, refacing/painting cabinets, or updating appliances, costs far less than a kitchen gut job but still adds value to your property. Other high ROI improvements included those listed in the Forbes article, with a new garage door coming in as the improvement with the highest ROI. Who knew a new garage door could be such a great investment?!

How much should a homeowner spend on a remodel to maximize ROI?

Simply put, there is no one size fits all answer to this question. Instead, when figuring out how much to expend on a remodel, a homeowner should look at why they are remodeling (are they looking to sell, updating their space for their own use, etc.), what their budget is, and how much the cost of such improvements (labor and supplies) cost in their area. If the purpose of the remodel is to attract buyers and/or to increase ROI, a homeowner should also consider that the ROI of a remodel is not a fixed measurement and is highly dependent on the market and the condition of the rest of the home. For example, in today’s Covid-impacted, highly competitive, low inventory market, where buyers are not able to be as picky as before, an updated kitchen/bathroom may have less influence on the desirability of a home than factors like the home’s location and lot size. Also, if the rest of the home is outdated with only kitchens/bathrooms updated, it may attract buyers who are looking for a fixer-upper who would have preferred for the kitchen and bathrooms to be updated by them to their taste after buying versus to the seller’s taste before listing.

While ROI is an important and valuable measurement that can help a homeowner decide where to make updates to their home, it is important to remember that ROI does not take into consideration the value in loving the space you are living in and having it work for you and your needs, nor that some buyers prefer an outdated property so that they can put their own stamp on it.

Thanks to our lovely reader for submitting this terrific post topic! We would love to cover more topics that are of interest to you all, so please submit your questions and suggestions to us. In the meantime, we are off to get a quote for a garage door replacement. 😉

To learn more about the real estate market, or to specifically discuss the San Diego real estate market, please contact Paris M. Torkamani at ptorkamani@esquirereb.com or 949-413-6699. To learn more about the Los Angeles real estate market, please contact Amir Torkamani at atorkamani@esquirereb.com or 213-973-9439.