How much return on my investment can I expect from a remodel?

We know the real estate market has been shaky for years, but for homeowners, it can seem downright volatile. Depending on where you live and how much your home originally cost, your area might be rebounding from a crash, in the midst of crashing, self-correcting after a period of inflated prices, or any number of unpredictable market fluctuations. One thing's for sure -- when it comes time to sell your home, you want to get as much money out of the sale as possible.

A common way to maximize home value is by remodeling it. Homeowners seek to increase the eventual sale price by spending some money to get a new roof, update the kitchen, build a deck, put in an in-ground swimming pool, or replace aging windows. Some renovations bring a greater return than others, though. How can you decide what parts of your home to remodel to increase your return on the investment?

Let's start with a simple fact: There are no remodeling projects that will increase the value of a house beyond the actual cost of the remodeling. You'll almost never make money on a renovation. So if you're thinking of doing some remodeling, focus on things that will make the house more pleasant for you to live in for as long as you remain there. Don't remodel for the next owners; remodel for the current ones.

Of course, there's an exception to every rule. If you'd like to find out the one way to actually make money on a renovation, and how to get the most increase on your home's value before you sell, this article will show you the way.

Do It Yourself

That rule about renovations never being worth more than they cost assumes one crucial thing: that you're paying someone to do the work. Factoring in labor costs, the return on the money you put into remodeling will never exceed 100 percent. But what if you don't have to pay labor costs?

If you have the know-how, the time and the tools, you can do the work yourself and pay only for materials. That way, you're putting "sweat equity" into the home, which you'll get back as cash when you sell. Make sure you really know what you're doing, though. A botched or shoddy job will only detract from your home's value, and could end up costing you a lot more if you have to pay someone to fix your screw-ups.

Luckily, some of the remodeling projects that typically offer the best return on investment aren't especially complicated. Building a deck doesn't require much in the way of specialized equipment or skills, just a lot of time and some careful planning and measuring (not to mention a whole lot of rechargeable batteries for your cordless drill). Updating your kitchen or bathroom with new flooring or countertops is pretty DIY-friendly as well. If your planned project involves major structural work on the house, roofing, electrical work or complicated plumbing, you're better off leaving that to a professional [source: Price-Robinson].

Which remodeling projects are worth the most when you sell your home? Find out in the next section.

Projects with Maximum Return

When you sell a house that's been renovated, you can expect to get somewhere between 60 and 85 percent of the renovation's cost added to the value of the house [source: Remodeling]. A lot of factors will affect the actual amount, but one of the most important factors is the specific remodeling project. Adding a wooden deck brings the best return on investment. Replacing the siding and windows on a house also adds good value, around 80 percent of the cost of the project. Minor remodels of kitchens and bathrooms can return close to 80 percent of the cost too.

Some of the less cost-efficient remodeling projects are major additions. Adding a whole room, expanding the house, building a garage, even adding a second story are expensive projects that may only recoup 60 to 65 percent of your costs.

These are very general numbers, of course. For a more detailed look, broken down by region within the U.S., you can take a look at this table compiled by Remodeling Magazine.

Some of those numbers may sound bleak, but there's a bright side. They only represent a poor investment if your sole purpose is to increase the value of your home. If you're planning a remodeling project because it's something you want for you and your family to enjoy, then look at this way: Adding a second story to your house so the kids can have their own rooms will be expensive, but when you sell the house you'll get as much as 65 percent of that cost back. That's not a bad deal.

What about all the other factors that affect the value of a remodeling project? We'll break those down next.

Price, Location and Time

Other than the specific remodeling project, what other factors will affect the value you ultimately derive from remodeling? Here are a few keys:

The price of the house and the cost of the renovation. As a general rule, smaller renovations on less expensive houses tend to return a greater percentage of their cost. Of course, the absolute numbers are smaller -- that is, 75 percent of a $6,000 project is less than 60 percent of a $25,000 project [source: Remodeling].
Location is key. One of the cardinal rules of remodeling is: Don't increase the value of your home beyond the neighborhood. The neighborhood is one of the biggest things home buyers are interested in -- they'll see an area they like with home prices they can afford and start their shopping there. It's unlikely that a house will sell if it's priced way above the going rate for other homes in the area. That means that if you put in some pricey renovations, you won't get as much of the cost back when you sell.
Look for government assistance. You might be able to bring down the cost of some home improvement projects using government programs that will subsidize a portion of it, especially if you live in a low-income area or are putting in energy-efficient upgrades. If you pay for the remodeling with a home equity loan, the interest will probably be tax-deductible.
Time is money. Everything depreciates over the years, including remodeled homes. Mechanical upgrades are the most time-sensitive, since furnaces, hot water heaters and other major systems eventually wear out and need to be replaced again. Roofs and siding suffer the same fate, but at a slower rate. You can keep remodeled areas from looking dated by sticking with classic styles instead of the latest trends [source: Tracey].
Don't forget the importance of curb appeal. Some projects influence the value of a house simply because they make the house look better and more appealing to a prospective buyer who's just driving by. New siding, roof, and windows can make a house look well-kept and maintained, while touching up paint and adding some landscaping can add value even if you didn't have to spend much time or money to get it done.

Author's Note

I've been steadily making improvements on my house since I bought it -- new furnace, new roof, hot water heater, garage door. Mostly I fix things as they break, so I haven't given much thought to remodeling for the sake of increasing value. Still, I think the basic advice in the article holds true -- don't try and make money by renovating; make renovations for yourself. Any extra value you get out of it is just gravy.

Sources

Price-Robinson, Kathy. "How Much Will That Remodel Add to Your Home's Resale Value?" DIYLife, Feb. 2, 2010. (May 5, 2012). http://www.diylife.com/2010/02/02/how-much-will-that-remodel-add-to-your-homes-value/
Remodeling Magazine. "Remodeling Cost vs. Value Report 2011-12." ( May 5, 2012). http://www.remodeling.hw.net/2011/costvsvalue/national.aspx
Tracey, Melissa. "Don't Do These at Home: 3 Big Remodeling Mistakes." Realtor Magazine, June 13, 2011. (May 5, 2012). http://styledstagedsold.blogs.realtor.org/2011/06/13/dont-do-these-at-home-3-big-remodeling-mistakes/