4 Types of Home Renovation: Which Ones Boost Value?

Homeowners often undertake major remodeling projects to upgrade their residences before putting them up for sale. After all, renovations always send the sale price soaring, right?

Unfortunately, not.

More often than not, upgrades fail to pay for themselves. Read on to find out how to renovate strategically and which projects really add value to your property.

The Difference Between Investors and Owners

There are important differences in the way investors and owners approach home renovations.

Updating an investment property is a sound strategy—if it’s done the right way. Successful fix-it-and-flip-it professionals are investors focused on one goal: “Buy low, sell high.” When they purchase run-down homes at bargain prices, they know that a little sweat equity goes a long way toward making a real estate investment profitable, so they cut costs by doing most of the repairs themselves.

This kind of investor also carefully chooses remodeling projects that will result in the most value for the least amount of effort and cost. The first step of this process is to assess the other homes in the neighborhood to avoid over-improving the property. For example, if none of the other houses have crown molding and high-end countertops, adding these amenities to a fix-it-and-flip-it project is unlikely to result in a significantly higher selling price.

Owners, on the other hand, often take a less strategic approach when sprucing up their homes. As a result, they can end up putting significantly more money into a project than they will get back out of it when they sell. While it’s certainly a smart move to make a few improvements, it is unwise to overdo it in the expectation of a return at resale.

How do you know which upgrades are worth the hassle and expense—and which aren’t? To make the most of your remodeling budget, it pays to understand the typical return on investment from four types of renovation project: the basics, curb appeal, best bang for the buck, and passion projects.

1. The Basics

The basics are the things that every buyer expects when they purchase a home. This includes a roof that doesn’t leak, functioning gutters and downspouts, a dry basement, a reliable furnace, solid floors, walls that are in good repair, retaining walls that work, and functioning plumbing and HVAC systems. Potential buyers of any home—even first-time buyers—have a checklist that includes all of these amenities. In upscale properties, the basics might also include a certain number of bedrooms, bathrooms, and multiple-car garages, and any other features common to the neighborhood.

This doesn’t mean you have to upgrade all of it. You can focus on regular maintenance and smaller, cheaper improvements that keep everything in good working order. Adding the basics to a home that lacks them doesn’t add value; it merely brings the property up to the standards of the rest of the homes in the neighborhood, ensuring that you can ask a comparable price.

On the other hand, while you do want your house to stand out from the competition, you shouldn’t make upgrades that greatly exceed the neighborhood standard. Not only will you end up losing money, but you may also scare off potential buyers. In short, before you invest tons of money in an elaborate renovation project, consider what the competing properties in your neighborhood have to offer. Find out how similarly priced homes in your neighborhood measure up and make improvements based on your specific marketplace.

2. Curb Appeal

Curb-appeal projects make the property look good as soon as prospective buyers arrive. While these projects may not add a considerable amount of monetary value, they will help your home sell faster—and you can do a lot of the work yourself to save money and time.

Never underestimate the power of a positive first impression—from a well-manicured lawn, low-cost landscaping, fresh paint inside and out (at least the front door), clean carpets, and new exterior fixtures (e.g., address numbers). Lighting is another important feature (exterior and interior), but it can break the bank—or overrun your circuitry—if you overdo it. While you want the house to look bright and inviting, consider installing simple lighting for a modern upgrade.

Err on the side of plain vanilla, though. Now is not the time to incorporate bold design choices into the décor. Opt for subtle, tasteful designs that will appeal to a wider audience. If you need help with these projects, you can consult an interior decorating professional. Just make sure you lean toward inexpensive choices.

3. Best Bang for the Buck

Projects that add the most value at resale are the favorites of fix-it-and-flip-it professionals—and they should be high on a homeowner’s list, too. While these upgrades will not recoup all of their cost, some will come close.

The National Association of Realtors (NAR), in a joint study with the National Association of the Remodeling Industry, found that wood flooring (new or refinished), insulation upgrades, basement conversions, and closet renovations had the highest return on investment, often recouping 80% or more of their cost at resale. Certain exterior work—including roofing, garage doors, and new siding—also delivered a lot of bang for the buck at resale.

4. Passion Projects

Passion projects are investments that homeowners make in activities they love without regard to cost, including anything from swimming pools and tennis courts to hot tubs, wine cellars, game rooms, and even ponds. However cool these amenities might be, they are very expensive for the homeowner to install—and most prospective buyers (without your passion) are unlikely to pay more for your house to get the tennis court.

For example, a swimming pool rarely adds value to a home. Not only does it cost a small fortune to have an in-ground pool installed, but many home buyers also view a pool as a high-maintenance hassle and a year-round safety hazard—and it's useable only a few months a year in most climates.

There’s certainly no harm in adding these features to your house, but don’t expect potential buyers to be willing to pay a premium to get them when you are ready to sell. And be wary if the renovation means replacing a commonplace feature. If every other home in your neighborhood boasts a two-car garage, you should probably think twice about converting yours into a game room. Do you really want to be the only house in the area with no protected place to park?

Other conversions that might not recoup their investment at resale include:

• Transforming a bedroom into a studio
• Removing walls to enlarge a space (Unless there is a practical purpose, such as creating flow between the dining room and the kitchen, think twice about removing a wall.)
• Eliminating a bedroom to extend a room
• Remodeling the basement (Unless it's a full conversion to a real living area, stick to smaller improvements, such as upgraded storage capacity.)

The Bottom Line

Whatever the project you are considering, remember that your primary residence is not just a house; it’s your home. If you plan to live there for many years, add the amenities that you want to have, regardless of their impact on resale. When it’s time to sell, do the basics to get the property up to par for the neighborhood and add some curb appeal—but don’t bother undertaking several major projects strictly to increase the purchase price.

Elaborate custom upgrades may appeal more to you than to potential buyers. It’s best to make small, décor-neutral renovations that improve the functionality of your home. And remember, even with the real estate renovations that are known to add value, the chances are good that you will spend more money than you will get back at resale.