Home Improvements Cost-Value Cash-On-Cash Returns Rise as the Overall Market Rises
I am often surprised when I see homeowners getting their homes ready to sell without anticipating doing any repairs or improvements. I am even more surprised when I see realtors counseling their clients not to do repairs or improvements because “the market is hot, let’s just get it on.” Notwithstanding the period of time during the Great Recession, where improvements did not give the cost-value returns we are used to seeing, properly thought-out home improvements will typically give homeowners very nice cash-on-cash returns when they list and sell their homes.
Cost-Value Ratio Defined
Recently, Remodeling Magazine combined with the National Association of Realtors completed their 2014 Cost vs. Value report that showed for the second straight year that the cost-value of remodeling is on an upswing. One would be correct to assume that the cost-value of remodeling improvements mirrors the fluctuations in the overall real estate market. The cost-value ratio is defined as the resale value of remodeling improvements as a percentage of the cost of construction. Thus, if value and cost are identical the cost-value ratio is 100 percent.
Timing Is Everything
Some examples of recent annual cost-value ratios show consistency in the theory that real estate market trends coincide with cost-value ratios. In 2005 prior to the market peak and crash the national cost-value ratio was approximately 86.7% which continued downwards for the next eight (8) years until the 2013 rebound. In 2014 the national ratio is approximately 66% which represents 5% points higher than 2013.
If we all had crystal balls we probably wouldn’t have to work as hard as we do. However, without one, we need to be mindful of the current environment and trends to make the best remodeling decisions. For example, if you remodeled and dialed-in your bathrooms and kitchen eight years ago and they are still cutting edge and in-style you would be looking at covering your costs based on improved property values in pretty much the entire country (and you enjoyed those improvements for the last eight years). If you installed these same improvements in the Bay Area you probably did really well – maybe even 2X or 3X cash-on-cash returns (where can you get 200-300% cash-on-cash returns in the investment world?).
How Does Your City Rank in Cost-Value Ratio?
Residential real estate markets are very localized, and this fact, along with whether or not your long-term plans include staying in your particular neighborhood should be the two primary factors in your decision to take the plunge into a major remodeling project. The value of your remodeling decisions at the time of sale is another crystal ball question; however, location, design, workmanship, and buyer demand for your specific installations all come into play.
Honolulu ranked number one for cost-ratio values at 111%, San Francisco was 2nd at 109%, and San Jose was 3rd at 100%, San Diego, CA was 4th, Bridgeport, CT was 5th, Fort Meyers, FL was 6th, Charleston, SC was 7th, Oklahoma City, OK was 8th, Washington, DC was 9th and Austin, TX rounded out the top ten.
What Projects Have The Best Cost-Value Ratio?
If you are considering improvements to your home please take into consideration the data from this report which shows the highest return on investment (ROI) for individual projects:
– Entry door replacement (20 gauge steel);
– Deck addition (wood);
– Garage door replacement (mid-range);
– Garage door replacement (luxury);
– Attic bedroom addition;
– Minor kitchen remodel;
– Window replacement (wood);
– Siding replacement;
– Back-up power generator;
– Basement remodel; and
– Window replacement (vinyl)
The 2014 report suggested that these following projects were very important to buyers: 1) granite or similar stone countertops; 2) kitchen island and double sink; 3) energy efficient windows, appliances, and programmable thermostats; 4) a walk-in closet; and 5) a great room.
Pools Are Not For Everyone
Pools were not included on the above list for good reason. Traditionally, pools are not good returns on investment. A lap pool might be a great idea for owners who would like to stay in shape but they are not attractive to a young family with kids who value flat, free roaming back yards without the maintenance costs associated with a pool. Importantly, some buyers fill in pools the moment they close escrow to limit liability and create usable space for their children.
Seek Advice and Counsel of an Experienced and Competent Realtor
Not all realtors are created equally. The better realtors will offer complimentary services including making recommendations, referring vendors, contractors, designers, and even managing day-to-day scheduling of tasks for your contemplated renovation projects. No matter what project you are considering you should consult with an experienced and knowledgeable realtor to get some market input and another set of experienced eyes looking at your home (through the eyes of a prospective buyer). Remember remodeling projects almost always go over budget and if you are looking for a high cost-value ratio and high cash-on-cash returns a local experienced realtor can give you a good idea of the current market trends in your neighborhood. The bottom line is don’t do this project alone – get help.