Case Study: How is a Remodel an Investment?

When considering a home remodel, one of the first things people ask is whether or not they’ll get a good return on their investment. This is an important question to get answered before you pay for a remodel. As the cost of remodeling continues to increase, homeowners want to justify spending the money to improve their houses.

At Lamont Bros., our design-build team has remodeled hundreds of homes across the Portland Metro Area. Time and time again, we’ve seen clients add tens of thousands of dollars in additional value to their homes while also improving their quality of life. 

It’s important to remember that a remodel isn’t just a financial investment – it’s an investment into your own comfort, as well. However, for the sake of simplicity, this article will focus on the financial aspect of remodeling as an investment. 

We’ll explore a case study involving two near-identical homes in Portland’s Hazelwood Neighborhood. The information on these homes was provided by Tim Jackson at Berkshire Hathaway Northwest Real Estate. In this article, you can expect to read about:

• Case study homes “A” and “B”
• Home value trends
• Remodel budgeting & financing
• How remodeling affects a home’s value over time

Case Study Homes

To better understand how a home remodel can serve as a long-term investment, this case study uses two very similar* homes with one significant difference: 

The first home, which we’ll call “Home A,” has not been remodeled within the last 40 years.

The second home, “Home B,” was extensively remodeled in 2021.

Home A

Year built: 1949

Neighborhood: Hazelwood, Portland, OR

Style: Cape Cod

SqFt: 2,116

Bedrooms: 4

Bathrooms: 2

Recent renovations: None

Home B

Year Built: 1949

Style: Cape Cod

Neighborhood: Hazelwood, Portland, OR

SqFt: 2400 (See “addition” info below)

Bedrooms: 4

Bathrooms: 2

Recent Renovations: 2021, Full Remodel

• 284  sq. ft. addition
• Kitchen remodel with new appliances
• 2 Bathroom remodels
• Refinished hardwood floors
• Exterior paint
• Interior paint
• New hardware and doors

*Homes A and B were built using identical floor plans. Renovations to Home B altered the floor plan and added square footage not present in home A. Additionally, Home B’s lot is 37% larger than home A’s, so the property value is 10-15% greater, even with identical homes. 

Home value trends comparison

The housing market in Portland is in the top 10% nationwide for home value growth. Over the last 10 years, home values have increased by an average of 7.15% per year. In 2021, however, home values skyrocketed by 19.2%, with a projected growth of 13.3% over the next year.

On average, the housing market has increased about 5% per year over the last 20 years even through the Great Recession.

Home A

If you consider it’s value history, Home A is an excellent example of Portland market statistics in action:

In the nine years between 2011 and 2020, House A increased in value at an average annual rate of 9.8% for a total dollar amount increase of $211,300.

From 2020 to 2021, that rate of growth was 15.2%, raising the value in the last year by $56,400. The home was sold in July of 2021 for $417,000.

At the projected rate of growth, House A will increase in value by another $56,900 by the end of 2022.

Home B

Without a remodel in 2021, Home B would have likely followed a similar trend as Home A.

As you can see, Home B started off in 2010 valued 15% above Home A. By 2020, it was worth 12.8% more. Without a remodel, both homes would have likely appreciated in value at about the same rate, and Home B would have remained worth 10-15% more than Home A.

However, due to the extensive remodel in 2021, the actual value of the home increased significantly more between 2020 and 2021, and sold for $600,000 in May of 2021. This trend is reflected in the chart below.

Based on the difference between the projected price in December of 2021, the remodel on Home B immediately increased the home’s value by $139,400. By the end of 2022, the remodel alone will have added $158,800 to the home’s value due to compounding interest. 

Now, Home B is worth 45.4% more than Home A. 

Remodel pricing and financing options

Depending on the scope, quality, and cost, a well-designed remodel should immediately add anywhere from 65-80% of its cost back into the home. In other words, whatever money you put into the remodel, you immediately make back 65-80% of its total cost in added home value. 

Remodel price estimating 

Although Home B’s remodel was not performed by Lamont Bros., our design team analyzed the scope and quality of the work done on Home B and estimated what the cost would be for this remodel at builder-grade pricing.

Home B Remodel Cost

• Addition + Cosmetic Refresh: $111,177.60
  • 284 sq. ft. addition
  • Interior paint
  • Exterior paint
  • Sand & Finish Hardwood Floors

• Kitchen Remodel: $49,321.58
  • Remove structural wall
  • New appliances
  • “Good” level cabinets

• Bathroom Update #1: $22,281.39
  • New tile surround
  • Installed pedestal sink
  • New medicine cabinet
  • New wall cabinet

• Bathroom Update #2: $22,281.39
  • New tile surround
  • Installed pedestal sink
  • New medicine cabinet
  • New wall cabinet

Total Cost: $205,061.96

At this price, the $139,400 added to the home’s value recoups 68.0% of the total project cost, leaving an initial value deficit of $65,661. This is the value that the home must now appreciate in order for the remodel to pay for itself.

What about remodel financing?

Many homeowners don’t actually pay the full cash amount for a home remodel. Instead, they finance the project by leveraging the equity in their home.

There are several different financing options available, and each one is a little different. You can read more about remodel financing in our article Home Improvement Financing: What are my Options?

By leveraging the home equity to finance a remodel, your return on investment can often be greater than the initial cost of the project itself. 

For example, if Home B had $200,000 in equity, the homeowners could borrow up to 80% of that amount for a remodel. That would mean a lump sum of $160,000. Loan fees for this type of financing typically cost about $3,000 upfront. The homeowner would then have to pay cash on the remaining $45,061.96, bringing the initial out-of-pocket cost to $48,061.96.

How can a remodel be a long-term investment?

Even with financing, a remodel is only financially reasonable if it generates more equity than it would have if you didn’t remodel.

For Home B, the cost of the remodel is $205,061.96. The cost of not remodeling home A is $0. A remodeled home and a non-remodeled home will both appreciate in value.

Therefore, Home B’s value appreciation must first recoup its costs before it actually adds value to the home. On the other hand, any increases in value with a Home A simply add equity to the home.

The difference between the two is that, since the remodeled value of Home B is 45.4% greater, it will increase in value by a greater amount than Home A every year. Why? Well, if Home A is worth $428,000 and Home B is worth $622,100 and both grow by a rate of 13.3% over the next year, then Home A will increase in value by $56,924, while Home B will increase by $82,739.

So, Home B will increase in value by more than Home A every year. If you decide to sell your home immediately after remodeling, you’ll probably lose money because the home hasn’t had the chance to appreciate in value. But, if you wait several years and then sell, you could end up making more than you would have without a remodel. It all depends on how much you spent on your remodel and how long you let your home’s value appreciate before selling. 

At Lamont Bros, we use a proprietary home investment calculator to help our clients decide whether or not their proposed remodel is a good financial investment for their homes. 

The information below reflects calculations based on the following variables about Home B:

What happens if you sell after a year?

Hypothetically, if the homeowner of Home B were to sell in one year, remodeling might make sense. At the projected market growth of 13.3%, the home’s value would increase enough to pay for the total cost of the remodel, plus an additional $62,183.50. 

However, the total cash gain on the home’s remodeled value doesn’t quite overtake what it would be without a remodel, due to the remodeling cost setbacks. 

In this case, remodeling Home B might be worth the added comfort while you live there, but it doesn’t make you more money than it would without a remodel after one year. The home’s value increases enough to cover the cost of your remodel, but not remodeling at all would put an extra $2,000 in your pocket by the end of the sale.

What happens if you sell after 5 years?

If the Portland housing market grows at its average rate of 7.15% each year, the remodel makes much more financial sense after waiting for 5 years.

Due to the remodel’s compounding interest, Home B’s value grows more each year than it would without a remodel. At 7.15% growth over 5 years, the remodel alone would add $196,949 to the home’s value. So after paying off the loan, you still end up with a total cash gain of $249,193, which is $50,000 more than you would make without a remodel.

What if you sell after 10 years?

Just for kicks, let’s take a look at the difference between Home B’s remodeled and non-remodeled value after 10 years.

Assuming once again that the market value increases by an average of 7.15%, Home B is worth $1.2 million with a remodel after 10 years, with a total cash gain of $631,090. Without a remodel, it’s still worth quite a bit, at $962,940. However, the cash gain difference between the two stands at $150,850. 

So, if you plan to live in your home for many years, a remodel not only makes sense from a comfort standpoint, it also could pay off as a profitable investment in your home.

Should you wait to remodel?

Due to the increased cost of remodeling, many homeowners have decided to hold off on a big home renovation until prices go back down. Unfortunately, this is unlikely to happen. While prices may stabilize close to their current dollar amounts, historically, the cost of remodeling has always risen, except for during major economic downturns.

Keep in mind that a remodel increases the value of a home by 65-80% of the cost of the remodel. That means that if you want to increase the value of your home by a given dollar amount, you have to spend 1.2-1.5 times more than that. 

As home values continue to increase, that means that so will the cost of remodeling. 

How much would it cost to raise Home A’s value to that of Home B?

Let’s use our two homes again to look at the cost of adding value to the home. In 2021, Home A was worth $428,000, while Home B was worth $622,100. That’s a difference of $194,100.

So, in order to raise the value of Home A to that of Home B, at a 68% return on investment, a comparable remodel would cost $291,150. But that’s if you remodeled in 2021. The chart below shows how that price may continue to increase as the homes grow in value. 

In 10 years, the cost to remodel Home A to the value of Home B is double what it would be today. At the same time, the remodeled value of Home B doubles over 10 years. 

As the saying goes, “The best time to plant a tree was 20 years ago. The second best time is now.” The same is true for remodeling.

It’s true that not all homes need a remodel, and not every homeowner can afford it. However, for those who are in a position where a remodel makes sense, it is important for you to know that the longer you wait to remodel, the more it will cost, and the more home equity you’ll miss out on.

Want to know how much specific remodels cost?

If you’re considering a home remodel, but want to learn more about costs, check out our Costs Overview page. There, you can learn more about average remodel costs in the Portland area and read more case studies. You might even see some design elements you want in your own home!

Remodeling your home is a big step, and you’ll do yourself a huge favor by researching until you’re confident in making a decision. When you’re ready to talk with a design consultant about how a remodel can serve as an investment in your home, click the button below to schedule a free video consultation with our design team.