Home improvements can materially add to the value of your home. It’s no wonder that Americans have steadily spent more and more money on their home improvements, with total spending rising from $267 billion in the first quarter of 2015, to an expected $370 billion in the first quarter of 2022. Home improvements are an investment in your home, with a long-term return. However, as the economy strains, and homeowner budgets are stretched, getting the most out of a renovation budget is more important than ever.
Invest in the Vital Few
Italian economist, Vilfredo Pareto, found that 80% of outcomes are driven by just 20% of causes, or what he called, “the vital few”. This is known as the Pareto Principle. You see, not every home improvement will result in any value creation for your home. Your job isn’t to spend $x to generate some return in the future, it’s to deploy $x on the right home improvements. Echoing the Pareto Principle, Full Coverage Painting & Flooring has found that refinishing floors and installing new flooring, has the greatest return on investment in home improvement projects.
CNN’s own reporting shows that Full Coverage Painting * Flooring’s assessment is correct. CNN has found that, given a cost of refinishing of $3,400, a homeowner can expect an approximately $5,000 return on investment, or 147% return. Assuming a cost of installing hardwood floor or $5,000, a person can expect an estimated $6,500 return on investment. Now, let’s say you want to add a new main bedroom, and that will cost about $182,000. You can expect just a 56% return on investment, which will cover just $100,000 of your costs. In other words, you will make a loss.
CNN’s findings are that after refinishing floors and installing new hardwood, the home renovation with the second largest return on investment, is upgrading your insulation! For a cost of about $2,500, you can expect a return of 100%.
So the issue isn’t, as we have said, about spending money, but about spending money efficiently. The kinds of investments with the best returns on investment also happen to be the most affordable, and for many people, these may be projects that can be financed out-of-pocket. It doesn’t make sense to tackle the bigger projects unless you’re doing it for yourself, and you are not looking to sell your home down the line, or, unless you believe that something about that remodel will allow you to beat the typical return on investment.
Use the Right Financing
Affordability is less of a problem with the kinds of projects we have been advocating. If you do want and need to invest in large projects, your best option is a home equity line of credit (HELOC), because of the size of the loan, so a credit card won’t cut it, and a personal loan will incur a very high interest rate. In this interest rate environment, a cash-out refinancing is simply too expensive. A heloc mortgage is an interesting option, but the interest rate will have a higher interest rate because of the risk of non-payment, but it is less costly, as we said, than credit card or personal loan interest rates. Smaller projects, the kinds we have advocated, can be handled with credit card payments or personal loans.