Home Renovations: Return on Investment

Many homeowners look at return on investment when making a renovation decision.  They want to make sure that whatever money is spent on a renovation today could be recovered if the home was sold tomorrow.

It is important to look at whether a renovation makes financial sense.  However, few custom renovation and remodeling projects, completed properly, will give full payback.  In most cases, every dollar spent will return less than one dollar, if the house was sold.  If return on investment is the only decision criteria for your project, stop reading now, and don’t renovate.   Maintain and repair to keep the home safe and prevent damage, but don’t renovate.

Homeowners renovate to meet a need, but also to fill a want.  The need may be a necessary fix of a leaky shower that is causing damage to the room below.  The want may be a larger master bedroom with an ensuite and a walk-in closet.

Let’s use a car analogy to explain need and wants.  A compact 4 four door car will suit the needs of most people.  It has the lowest capital cost and ongoing maintenance costs, therefore the least expensive overall to operate.  But how many people buy these cars?  Look at all the mid-size cars and SUVs on the road, not to mention the growing number of luxury vehicles, and pickup trucks that aren’t picking up anything.  Many of these vehicles may cost double or triple the cost of the four door compact car.  Some of these are on the road because people need them.  Most are on the road because people want them.  They are buying these vehicles because they can afford them and because these vehicles will bring them pleasure and satisfaction.  The same principle applies with homes and home renovations.

Most home renovations and remodels make sense.  They fill a need – a kitchen renovation that creates a more functional space, or a house addition to a small home in Toronto or Etobicoke that adds more space.  They also fill a want – comfort, a nicer looking home, impressing friends and neighbours,

The most important thing to look at with a renovation isn’t return on investment, it is timeframe.  How long you are going to live in your home, how long will the renovation or house addition meet your needs, and how much pleasure and enjoyment will the renovation give you.

A few years ago we undertook a renovation where the homeowner changed a three bedroom home into a two bedroom.  Many real estate agents would have told them it is a foolish move, the house will sell for less.  But they plan on living in their home for the next 30 to 40 years, and though they realize they spent money on a renovation that reduced the value of their home, they will get up every morning and know that they now have what they wanted, and will enjoy every minute of it.