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taddpeake

Please explain remodeling 'return on investment'

taddpeake
12 years ago

I'm confused. I've read a lot on how much return on investment you can expect from such and such remodeling jobs, 80%, 70%, etc. but what does that really mean?

Say I have a house that would sell AS IS for $200,000.

Say I spend $20,000 remodeling an old bathroom for an expected 85% return on investment. $20,000 * .85 = $17,000.

Does that mean that the selling price should go up to around $217,000, meaning that I only lose $3,000 of my remodeling money?

Or does it mean that the selling price should go up to around $237,000 ($20,000 + $17,000) meaning that I actually make money from the remodeling?

I realize these are pretend numbers. I'm just trying to make sense of the math.

Thanks for not making fun of me : )

Comments (12)

  • cearbhaill (zone 6b Eastern Kentucky)
    12 years ago

    The selling price should theoretically go up to around $217,000, meaning that you only lose $3,000.

  • Billl
    12 years ago

    ROI isn't hokum as a concept. Many improvements really do raise the value of a home. However, HGTV certainly have overhyped the idea. I live in a historic district. Renovated homes sell for WAY more than non-renovated. However, that is not the norm for most of the country right now.

  • chisue
    12 years ago

    Within a current RE bust area, you will spend more to renovate than you would pay to buy heavily-discounted existing RE.

    You are smart, though, to think about what market value you will have at the end before you invest in remodeling. We've been happy to have done a teardown/new build instead of extensive remodeling. An all-new house beats most remodeled ones if you're comparing apples to apples...unless the house is historic, as in Bill's case.

  • bozogardener
    12 years ago

    If you've bought the clunker in the neighborhood, where all of the houses nearby are worth more, then it makes sense. But generally, if the neighborhood has formica counters, and you put granite counters in, you will not recoup that money. It is still a formica neighborhood.

  • taddpeake
    Original Author
    12 years ago

    Great answers all. I was just trying to understand theoretically what was meant when they say a certain percent ROI for home improvement, whether it was loss they were talking about or gain. It should be gain, but you never know.

    It sounds like if (big if) everything is perfect, spending $30,000 with and expected 85% ROI should add $55,500 of value, netting $25,500 in profit.

    IF everything is perfect, which it rarely is.

    Thanks, all.

  • brickeyee
    12 years ago

    "spending $30,000 with and expected 85% ROI should add $55,500 of value, netting $25,500 in profit. "

    And a net loss of $30,000 - $25,500 = $4,500 unless y\there are some other considerations (like reduced carrying cost from a faster sale).

    It is VERY rare to get back 100% of the cost of ANY improvement.

  • terezosa / terriks
    12 years ago

    Brickeye is correct. For instance you have a house that would sell for $200,000, and you spend $50,000 updating the kitchen. If the ROI in your area for such an update is 75% you can expect to add $37,500 to the price of your house, making the new value of the home $237,500, for a net loss of $12,500. In other words, don't spend a lot of money on updates and expect to make a profit. Do the updates for own enjoyment, and hopefully, when it comes time to sell, you will sell more quickly. Of course if your $200,000 home is already at the top of the market in your area, your ROI % could be much lower.

  • azmom
    12 years ago

    I thought ROI = (Gain from investment - Cost of investment)/Cost of investment.

    It is the money you "gain" in addition to the money you invest, instead of the money you get back after your investment.

    Therefore if ROI on $50K is 75%, then you gain $37,500.

    The total added selling price should be $87,500 = $37,500 + $50,000.

    ROI = 75% = ($87,500 - $50,000)/$50,000.

    In the example terriks gave, you only add $37,500 to your selling price after you invested $50,000, then you lose money. ROI = -25% =($ 37,500 - $50,000)/$50,000

    Disregard everything else, you need to find a steal in a neighborhood and carefully fix it up in order to bring the house selling price to the neighborhood norm.

    You would need to make 82% ROI, then have the chance to realize 75% ROI after paying 6% agent fee and 1% selling cost (of course 6% and 1% are just assumptions).

  • brickeyee
    12 years ago

    In remodeling it is usually the percentage of the improvement cost you recover.

    Spend $20,000 on a kitchen, recover $15,000 in increased value, 75%.

    It is rarely 100% (or more).

  • Billl
    12 years ago

    Somebody, probably an HGTV employee, convinced everyone in the remodeling world to use a different meaning of ROI than the rest of the business world. azmom is right that ROI is generally calculated as net gain per dollar spent. That way, if someone says they had a 10% ROI, they actually have 10% more money than they started with. Since almost every home improvement is a money loser, the business world ROI would be negative. Somehow, you sell more if you say "85% ROI" than "negative 15% ROI". The negative makes it sound like ***gasp*** you are losing money by putting in that new, fancy kitchen. Well duh! Living a more luxurious lifestyle costs more money. It is really unusual for people to be able to make money just for living in a fancier house.

  • brickeyee
    10 years ago

    You can make it positive, but you likely will be investing a lot of 'sweat equity.'

    YOUR labor is assigned no value.

    I have spent 30+ years and bought and sold more houses than I can recall.

    You have to buy well under the market value you will end up at, then do a LOT of work yourself (not by hiring subs to do the bulk of the work).

    The majority of the houses have come from estates, and the next block is folks finally leaving their home (either commercial assisted care places or children) when they can no longer live alone.

    The slang name for them is 'old lady houses.'

    Many of these houses have been poorly maintained and not upgraded for many years.

    You can actually make money replacing a 1950 kitchen in 2013 (you need to be cognizant of how the neighborhood has gone and match it, those houses are your competition).

    I have been caught by market down turns.

    You need the resources to rent the place and wait for the market to revive.
    Not having overbuilt can allow a neutral to positive cash flow.
    I rarely have significant repair costs when renting.
    The place has already been renovated.

    Tenants seem to be better behaved when the place looks new and well cared for.

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