OfflineWhen it comes to home renovations, new data supports smaller being better. An article at msn.com reports that on average U.S. homeowners who made home improvements in 2011 only managed to pick up 58 cents in home equity for every dollar they spent. This is according to data released by Remodeling Magazine.
The return on remodeling investment peaked in 2005 at around 76% of cost. Of course this was in the heyday of price appreciation. It’s logical that costs and equity return would drop along with home prices. maller projects do better, with roof work and new doors returning around 76%. People are doing the things they must do more than the more discretionary projects.
The average home improvement project cost $44,734 in 2011, down from $45,593 in 2010. Resale value of the improvements fell more, 3% below the previous year. With so little new construction, the good news is that costs keep falling as contractors who have no new construction work are competing for remodel projects.
Other popular projects are energy efficient windows, new garage doors, and adding space that doesn’t require a change to the home footprint. The highest value-to-cost project in 2011 is the replacement of a front door. This cost an average of $1238 and recouped $903 of that in resale value, 73%. This was for replacement of the door with a steel door. Using fiberglass increased the cost and dropped the return to 56.3%.
On the higher end of the cost spectrum, but yielding a good return was adding an attic bedroom. Averaging $50,148 in cost, it added an average $36,346 in value, or 72.5%. This could be influenced by the current housing situation and many young people moving back in with parents rather than buying a first home.
Cabinet door and hardware replacement recouped 72.1%, but full kitchen remodels costing on average $110,938, only recouped 57.4%, or $63,731. Resale value is normally not the major factor in the decision to remodel, but it is one that has stopped some projects. For investors buying rental properties, this data should enter into purchase and rehab decisions.
This just goes to prove Greg Murphy's principle of "knock the ugly off it" even more. I think this is where many first time investors go wrong - they get emotionally attached and want everything to be perfect, only to spend money on things that don't improve the value enough to justify their cost.
good post;
I guess investors need to know the area where they're investing and whom they are selling to; if it's not an assignment you may need to do more than 'take the ugly out of it'.
Most experienced investors know what and how much to invest to rehab a property.
Also, if you're planning on holding and renting, you need to know what the city health department and/or Section 8 department will require before you can get a renter in the property.
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Valerie
Valerie
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If investors use the formula 70% of ARV minus repairs, don't you get 100% return on your improvements?
Since we're not in this just to keep ourselves busy, you've got to make a profit. The average homeowner might get these kinds of returns on investment, but, a real estate investor has to put a very sharp pencil to his (or her) improvements so that at the end, there is a profit not a loss. You must realize 120% or more on your total investment cost.
The rehab choices must be made with two things in mind:
1) What will it take to make this property appraise and finance at the desired sale price? (The buyer can't buy it if the bank won't lend)
and
2) What will make the buyer want to buy MY house at xxx price, as opposed to every other house on the market? The buyer must see enough value in the rehab to sign on the dotted line.
If your rehab ideas don't pass these two points, then you are spending more than you need to.
Jill... the investor friendly REALTOR.
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I really have to know how to estimate your repairs correctly, in order to make a profit!
It comes with experience, doing it again and again
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Dennis
Is there a cap rate that investors should go by when doing rehab projects? We are always told to look for the ugly house, but when it comes to rehabbing it how do you know when the numbers are going against you. For example, the second boarded up vacant home that I am researching is not only vacant but is listed as "falling in on itself". I checked out the property and it is spacious enough. The home structure is a starter home that could be easily made into a two story adding needed space separating the bedrooms from the living area. I figured the vacancy and violations is enough to purchase the home at bargain but how far or what is the maximum should an investor spend to rehab a home to maximize profit?
On the Path
Anissa S.