The Federal Reserve has depressed interest rates to historically low levels, hoping to stimulate borrowing for investment and capital spending. On a household level, this appears to be happening. Home equity loans have surged, in large part to pay for new additions and remodeling projects – confirmed by the stock charts of Home Depot and Lowe’s.
Home remodeling is a wonderful undertaking. More useable living space, greater amenities, and a sense of pride are meaningful living benefits. However, if your home improvement dollars are spent to enhance the selling price of the house, particularly if a listing is imminent, make sure to carefully evaluate the cost benefit of any project – including the direct cost, probability of value recovery, and the opportunity cost of those dollars. Most homeowners tend to overestimate the expected financial return on large home improvement expenditures.
The table below helps to answer the question, “which remodeling projects pay off?”
| Midrange Project | Cost | Resale value | Percent recouped |
| Entry door replacement (steel) | $1,230 | $1,252 | 101.80% |
| Manufactured stone veneer | $7,150 | $6,594 | 92.20% |
| Garage door replacement | $1,595 | $1,410 | 88.40% |
| Siding replacement (vinyl) | $12,013 | $9,694 | 80.70% |
| Deck addition (wood) | $10,048 | $8,085 | 80.50% |
| Master suite addition | $111,245 | $68,596 | 61.70% |
| Backup power generator | $12,135 | $7,263 | 59.90% |
| Bathroom addition | $39,578 | $22,875 | 57.80% |
| Home office remodel | $29,066 | $14,155 | 48.70% |
| Sunroom addition | $75,726 | $36,704 | 48.50% |
SOURCE: Remodeling Magazine 2015 Cost vs. Value Report 03/06/2015
We spend the majority of our time at home. Pride of possession, family nurturing, and control of environment are uniquely positive attributes of home ownership. However, a positive financial return on investment (ROI) on your primary residence is not as certain as we are often led to believe. Taking into account debt service and carrying costs, a positive ROI is actually quite difficult to achieve.
Financial planning is all about “capital allocation.” Short-term life style choices have to be balanced against the long-term costs of retirement and aging. When making the decision to embark on an expensive home remodeling project, verify that your expectation for ROI is reasonable, and that you have properly prioritized the other financial commitments that confront you.
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