Is Remodeling a Good Investment?
There’s a lot to consider before you remodel your home. For many homeowners, one of the greatest hurdles is justifying the price. When you spend tens of thousands or even hundreds of thousands on a remodel, it’s reasonable to want that investment to pay off. So, is remodeling a good investment?
As one of Portland’s top remodeling firms, Lamont Bros. Design & Construction works with homeowners every day to transform their homes. Our clients often ask us whether remodeling is a good financial investment. While the answer to this question depends on each homeowner’s specific circumstances, remodeling can be a good investment under the right conditions.
The purpose of this article is to discuss when and why remodeling might be a good investment for your home. In it, we’ll talk about the financial and personal value of a home remodel. With this information, you should be able to decide whether remodeling is the right investment for you. Specifically, we’ll discuss:
- Things to consider when investing in your home
- How to tell if remodeling makes sense financially
- When remodeling is not a good investment
How can remodeling be an investment?
When deciding whether a home remodel is right for you, consider your motivations. If your goal is to invest in the most financially lucrative opportunity available, remodeling isn’t that. However, if you want to improve the home you live in while investing your money into a fixed asset that grows in value over time, then remodeling would be a good option.
A Remodel is an Asset that Grows in Value
While the primary motivation for remodeling is to improve the homeowner experience, remodeling can also be a good financial investment. The key is to give it enough time to grow in value. Here’s how it works:
According to Remodeling Magazine’s Cost vs. Value Report, most home remodels add 50%-80% of the project cost back into the value of the home upon completion. So, a $200,000 remodel could add up to $160,000 back into your home’s value immediately. As your home grows in value over time, so will the return on investment from your remodel.
With an average appreciation rate of 7% per year, the total value of your home should increase enough to recoup the initial cost of the remodel in 1-2 years. After that, it takes another 3-6 years for the remodel itself to start making you money. 10 years in, that $200,000 remodel alone could add $315,000 in value to the home. That’s a total profit of $115,000.
At Lamont Bros, we use a proprietary Remodel Investment Calculator. This tool shows you a side-by-side comparison of how your home will grow in value with and without a remodel.
Remodeling can Help you Keep a Low Mortgage Rate
Another way that remodeling can be a good financial investment is by keeping your mortgage rate low. In times when interest rates are high, remodeling often makes a lot more sense than purchasing a new home.
Let’s say you have a 3% interest rate on your mortgage and are currently paying a monthly payment of $2,500. Unfortunately, your current home isn’t working well for you, and you need a change. You’ll either need to move to a new home that better fits your needs, or remodel the one you currently own.
To sell your current home and purchase a new one means you would have to give up your low interest rate. An interest rate of 7% would raise your monthly payment to $4,000. That’s a $1,500 per month increase for a home of the same value.
Alternatively, you could choose to remodel your home. Instead of refinancing the whole home, you could take out a home equity loan, also known as a second mortgage. That way, you keep your current mortgage rate and only pay the higher interest of 7% on the equity loan. For the same $1,500 per month, you could borrow $225,000 to remodel your current home. Not only does that provide you with the opportunity to remake your home exactly as you want it — but you also end up with a home of considerably higher value.
Remodeling can be a Cash-Flow Investment
In most cases, you’ll have to wait until you sell or refinance to cash in on the value of your remodel. That makes it a fixed asset. However, under specific circumstances, a home remodel can be used as a cash-flowing investment. In these cases, the space has to be occupied by a tenant, which means you typically won’t be able to enjoy the remodeled space yourself. Here are a few ways to turn a remodel into a source of income.
A remodel can go a long way toward improving the appeal of a short-term rental property. Airbnb and VRBO both allow homeowners to list their homes as vacation rentals. According to AirDNA, the average monthly income for a short-term rental in Portland is $2,459. One great way to help your vacation rental stand out is to remodel a few interior spaces.
Kitchens and bathrooms are great candidates for a remodel when considering turning a home into a short-term rental. This is especially true for remodeling in older homes. Having a more contemporary kitchen and bathroom with modern amenities and appliances will appeal to a wider audience.
When preparing a home for short-term rentals, it’s also important to make sure that the space is in polished, liveable condition. Depending on the original state of the home, this may range from a few minor repairs and some new interior paint all the way up to a full home remodel.
Long-Term ADU Rental
Another way to invest in your home that allows you to continue living full-time on the property is to build an accessory dwelling unit, or ADU. Portland zoning laws are very accommodating for homeowners who want to build an ADU on their land.
ADUs are great investments because they can go almost anywhere on the property. You can build one attached to the main structure of your home or separate. You can even put one in your basement.
In the Portland area, ADUs typically rent for anywhere between $1,250 and $2,000 per month. For this reason, ADUs can be a great way to invest in the value of your property while also generating a secondary source of income.
Mother-in-Law Suite for Aging Relatives
If you have an aging parent, you’ve probably at least thought about what to do when they can no longer live by themselves. While retirement centers and care homes can be a good solution, they’re also very expensive. Most residents pay around $5,000 per month for assisted living care.
For those who are open to the idea of having their aging relatives live in their home, a mother-in-law suite is a great investment that can save your family thousands. Remodeling projects like this are often referred to as “aging-in-place” renovations. The goal of such a project is to arrange the space to be more accessible for mobility restrictions that often come with old age.
By adding a mother-in-law suite to your own home, you can save your aging loved ones the cost of an expensive care home. Plus, they’ll get to be close to family through their twilight years.
Remodeling is an Investment in your Quality of Life
Oftentimes, homeowners become so concerned with justifying the financial aspect of a remodel that they forget its primary purpose in most cases is to improve the experience of living in the home. A custom remodel is often more of an investment in the quality of your life.
Does that mean a remodel isn’t a sound financial investment? Of course not. Under the right circumstances, it certainly can be. But it does mean that a home remodel is typically a long-term, fixed-asset investment that you get to enjoy living in as its financial viability matures.
In America, the median length of homeownership is 13 years. This means that most homeowners stay in the same home for over a decade. If you live in a home for that long, it makes sense to improve the home for the sake of your user experience. Whether that be solving design flaws, updating the visual styles, or expanding your square footage, remodeling is about making your home better for you.
When deciding whether remodeling is the right decision for your home, it helps to ask yourself about the alternatives. Here are a few examples:
- If you want to take your passion for cooking to the next level, what might be some alternatives to remodeling your kitchen?
- If you’re doing an addition to make room for a growing family, what would be an alternative to adding a bedroom or bathroom?
- If you’re considering having your aging mother-in-law move in with you, how much does the alternative cost?
When remodeling projects become especially complicated or expensive is when homeowners start to consider whether they should move or remodel.
When does a remodel make a good investment?
Your specific circumstances will determine whether or not a remodel will make a good financial investment. To make sure your remodel will pay off, here are a few items that indicate whether remodeling is the right move for you:
You plan to stay in your home for the foreseeable future
The longer you plan to stay in your home, the more sense a remodel makes. First, consider the benefit remodeling will have on your lifestyle over that length of time. If you plan to live in your home for several years or even decades, remodeling will help the home serve your needs during those years.
From a financial standpoint, it also makes more sense to remodel your home if you plan to hold onto it longer. Remember, a home remodel grows in value over time. The longer you live in your home before selling it, the more time your remodel will have to gain value. At 7% growth per year, a remodel you originally paid $200,000 for would be worth $580,000 after 20 years. That’s almost triple the original investment.
You plan to work with a designer on your remodel
Design is an important part of developing a remodel worth your investment. A professional designer can solve your home’s design flaws and create a space that better serves your needs as a homeowner. It’s a part of the remodeling process that is often overlooked, but that makes a world of difference.
As a company that specializes in custom remodeling, we’ve been through hundreds of homes in the Portland metro area. Our team has seen remodels that were done without a designer that ended up detracting value from the home. Including a designer in the remodeling process could have easily avoided these costly mistakes.
One great benefit of working with a designer is that they can value engineer a remodel. This means they can make sure that the money you spend goes towards changes that add value to your home. By investing in a designer’s services, you’ll end up with a final remodel that’s worth more upfront and grows more in value over time.
You plan to make a lot of big changes during the remodel
To ensure your remodel pays off in the long run, you may want to consider selecting the type of projects that have the highest immediate return on investment. Typically, remodeling projects that have a direct impact on the user’s lifestyle will also have highest return on investment.
For example, kitchens and bathrooms are both spaces within the home that see a lot of use. Remodeling those spaces can dramatically improve the experience of living in the home. As a result, kitchen and bathroom remodels tend to have a high value once completed.
Alternatively, an addition increases the functionality of the home by adding more living space. If you can keep your cost per square foot low while substantially increasing the square footage of the home, the immediate return on investment should be relatively high.
When is remodeling not a good investment?
Other times, homeowners might find themselves in a position where remodeling doesn’t make sense as an investment. You might want to think twice about remodeling if the following circumstances sound like yours:
You plan to sell your house in the next 1-3 years
A remodel takes a lot of money and time to complete. Furthermore, the experience of living at home through a remodel can be very challenging. If you plan to move out of the home after only a few years, consider whether the cost is worth it. You’ll end up spending several thousand dollars and a few months of your life in a construction zone. Is all that worth a home you’re just going to leave in a few years?
On top of that, a remodel doesn’t grow in value enough to pay for itself until after 3-5 years of waiting. So, while a remodel can start to turn a profit after 3 years of waiting, you’ll lose money by selling the home any sooner.
You plan to do low-value, highly customized changes
Not all remodeling projects add substantial value to the home. Some changes are purely according to the homeowner’s taste and have very little effect on the home’s value.
For example, let’s say you own a craftsman-style home, but you want to change the style to be colonial. This is certainly possible, but it involves a lot of expensive changes throughout the home. It would likely require changing doors and window locations, altering the roof pitch, re-designing the exterior structure, and possibly adding new siding. Keep in mind that because none of these changes inherently add value to the home, you’d be spending a lot of money for very little return on investment.
Remodel projects that focus on purely stylistic preferences — especially when the original features weren’t outdated or in bad condition — don’t make for good investments. You end up spending more money than the remodel could realistically add back to the home.
Want to talk to a professional designer about remodeling?
Now that you understand more about how and when remodeling can be a good investment, take the next step! To learn more about how the design-build process integrates your designers and construction team for a seamless remodeling experience, check out Our Process. There, you can learn about what to expect during a home remodel.
Want to meet with a professional remodel designer to start planning? If so, click the link below to connect with a member of our design team. We’ll walk you through the challenges of remodeling so you never have to face them alone.