Two Rules for Home Improvements

How to Get the Most Value from Your Homer
By P. Christopher Music

Many people view their home as their largest asset. Thousands and thousands of dollars are spent each year by the average homeowner to renovate and maintain a home to provide a comfortable place to live. Recent economic events have finally shown us that housing values do fluctuate and, over the long run, tend to maintain their values after the effects of inflation.

If we view and treat our household as a for-profit business, and view the cost of the home as a business expense, we will spend a bit more time analyzing each expense and its contribution to the overall value of the home asset.

There is practically no limit on what we can spend our money on within the four walls of the house in which we live. But, there are a couple of rules that apply to these “investments”.

First, your personal residence is not an income-producing asset like a rental or commercial property. In a rental property or commercial building you are making money two ways—income from rents and appreciation, or the increase in the market value of the property. In a personal residence, however, you aren’t making any income from rents so the only potential financial profit is appreciation (sales price minus all of the costs of improvements). If you kept good records of the actual costs of improvements, I suspect that the profit after transaction fees is probably a bit less than you hoped. If you make a profit on the property, that’s great. But its primary purpose is simply a place to live.

Having said that, you will want to make improvements that actually add the most value to the property. These include roof and siding replacement, adding bedrooms and closet space, moderate remodeling and upgrading of bathrooms and kitchens, and minor landscaping.
Expenses to avoid are swimming pools and hot tubs, fancy landscaping, over-doing the remodel for the overall quality of the home, and other high-maintenance renovations.

Continually weigh the cost of the improvements with the added value to the property. Always spend money on the house with the idea of increasing its value.

Second, when it comes time to actually make the improvements, do it right. Put the effort in to get a few proposals from reputable contractors. If you’re going to spend thousands of dollars, then do the same due diligence as you would when you make any other investment with your hard-ea
ed money. Check out their credentials, interview past customers and references, investigate any legal situations, etc. At the end of the day, you are investing in people and their character, not bricks and mortar.
In my experience with professional services, you can either pay to do it right or pay to do it again. The cheapest isn’t always the best. Moreover, confirm that what the contractor will do for you is exactly what you want from a for-profit cost vs. value perspective. In other words, do not get lured into expensive add-ons that exceed your budget and the actual addition of value to the home.

The house means different things to different people. It has the emotional meaning of a home such as security, family, independence, status, etc. It also has a rational meaning of an investment asset such as taxes, maintenance, mortgage, insurance, etc. The key here is to know the difference between these two perspectives and don’t let the emotional feelings interfere with rational business decisions. Adding emotion into investments—fear, greed, unchecked enthusiasm, anger, etc.—usually ends with a high price tag and waste. Approach it in a business-like manner and one may see more acceptable results.