Return on Investment (ROI) is a common financial term that can be easily misinterpreted when used in a remodeling context. The simple definition of ROI is “the profit or cost savings realized for a given use of money.” ROI is usually expressed as a percentage that is calculated by dividing the profit (or cost saving) by the amount of the investment times 100. A $100 investment that produces a $25 profit is said to deliver a 25% Return on Investment.
Remodeling Return on Investment includes both quantitative and qualitative factors that should be considered when making a budget decision. The quantitative results are measured by the increase in property value related to a remodeling project, while the qualitative results are determined by the increased enjoyment derived from living in the improved space. Both quantitative and qualitative criteria should be considered, but their relative importance will vary based on your intended length of stay in the house.
Less than Five Years: If you are planning to sell your home in the next five years, it is smart to spend your money on improvements that will maximize the resale value of the house. In this scenario, quantitative factors will probably outweigh the qualitative ones. Consult with a real estate agent before finalizing the scope of work and budget for the projects you are considering.
Five to Ten Years: With this timeframe, you want to optimize the combination of quantitative and qualitative factors to inform your decision-making. A ten-year horizon gives you plenty of time to enjoy the results of the remodel, while gaining some financial benefit when you sell the house.
Over Ten Years: If you plan on staying in your home for more than ten years, prioritize your remodeling decisions based on your family’s needs and what you can afford, versus focusing heavily on resale considerations.
If you want to learn more about the types of projects that produce a high financial return on investment, refer to the Remodeling Magazine “Cost Vs. Value” report, www.remodeling.hw.net/cost-vs-value/2014/pacific/san-francisco-ca/, for guidance. This report provides a wealth of information about remodeling costs and ROI at the national, state and regional level.