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WHAT IS YOUR PROJECT?
- On average, home renovations provide a 70% ROI.
- Home renovations are one of the only investments that can improve the quality of life in your living space and increase the value of your home for the future.
- The home improvements with the best ROI are projects that add functional space and square footage. Common examples are finishing basements, addition projects that add bedrooms/bathrooms, and new kitchens.
- Home improvements that don’t add value are: luxury upgrades, aesthetic-only improvements, or out-of-the-norm projects for your homes in your neighborhood.
Understanding and Calculating Home Improvement ROI
Home Improvement ROI (Return on Investment) refers to the measure of the financial return or profitability resulting from a home improvement project. It indicates the amount of value or gain generated from the investment made in improving or renovating a property. In simpler terms, it assesses the return or increase in the property’s worth as a result of the home improvement efforts.
However, most home improvements will not give you a 100% return on investment. While HGTV shows like Fix it or Flip it can make it seem like renovations are a great way to make money, that’s not the reality for the majority of home remodeling.
Calculating Home Improvement ROI for homeowners can be estimated using a straightforward formula:
Home Improvement ROI = (Net Gain from Home Improvement / Cost of Home Improvement) x 100
How to Apply the Formula: Divide the Difference by the Cost of Home Improvement. Then, multiply the result by 100 to get the percentage.
For example, let’s say the Cost of Home Improvement is $10,000 and the Net Gain from Home Improvement is $15,000.
Difference = Net Gain - Cost of Home Improvement = $15,000 - $10,000 = $5,000
ROI = (Difference / Cost of Home Improvement) x 100 = ($5,000 / $10,000) x 100 = 50%
In this example, the Home Improvement ROI would be 50%, indicating a 50% return on the initial investment.
Remember, this formula gives you an estimate, and actual results may vary based on many factors.
The ROI from a home renovation depends on several factors:
- Real estate market
- Project type
Because of these factors, it’s important to note that there truly is no tried-and-true mathematical formula that precisely calculates ROI for home improvements - there will always be a variance.
Expert Tip: The only official way to calculate home value is an appraisal, which is a process where a real estate appraiser determines the fair market value of a home. However, there is a unique type of appraisal called an “as-completed appraisal” where an appraiser will look at your renovation plans and your current home value and determine how much value they will add upon completion.
As-completed appraisals cost money, and are normally only completed if part of the process for applying for a “renovation loan,” where the borrowing power is based on the equity of the home “as-completed.” One benefit of financing a renovation with a home renovation loan, which relies on this type of appraisal, is that you can be sure exactly how much value you’re getting from a renovation.
In other cases where you’re not getting an “as-completed appraisal” - all you can do is guess - or use our 70% rule of thumb to determine if your project has a good ROI
The 10 Best ROI Home Improvement Projects of 2023 (according to experts)
Every year, Remodeling, a highly regarded trade publication/platform, meticulously examines the costs and estimated value of major home renovation projects at resale. Our renovation experts recently reviewed their “2023 Cost vs. Value Report” analysis of 10 remodeling projects across 150 markets in the United States against the ROI/Recovery data of Investopedia, Zillow, and more experts.
By leveraging these national home improvement average cost and resale recoup reports, homeowners can optimize their financial gains and identify the projects that offer the best ROI.
1. HVAC (electrification)
- Average cost: $17,747
- Average resale value: $18,366
- Average recouped costs (potential ROI):103%
2. Garage door replacement
- Average cost: $4,302
- Average resale value: $4,418
- Average recouped costs (potential ROI): 103%
3. House siding with stone veneer replacement
- Average cost: $10,925
- Average resale value: $11,177
- Average recouped costs (potential ROI):102%
4. Entry door replacement (steel door)
- Average cost: $2,214
- Average resale value:$2,235
- Average recouped costs (potential ROI): 101%
5. Vinyl siding replacement
- Average cost: $16,348
- Average resale value: $15,485
- Average recouped costs (potential ROI): 95%
6. Fiber-cement siding replacement
- Average cost: $19,361
- Average resale value: $17,129
- Average recouped costs (potential ROI):89%
7. Midrange basic kitchen remodel
- Average cost: $26,790
- Average resale value: $22,963
- Average recouped costs (potential ROI): 86%
8. Vinyl window replacement
- Average cost: $20,091
- Average resale value: $13,766
- Average recouped costs (potential ROI): 69%
9. Midrange bath remodel
- Average cost: $24,606
- Average resale value: $16,413
- Average recouped costs (potential ROI): 67%
10. Wood window replacement
- Average cost: $24,376
- Average resale value: $14,912
- Average recouped costs (potential ROI): 61%
What is A Good Return on Investment for Home Improvement Projects?
The rule of thumb that we share with homeowners is that you can expect a 70% ROI, on average, with home renovation projects. With that said, there are some insights we can provide based on experience in the renovation world, as well as remodeling research.
Expert Tips on Home Improvements Return on Investment
If you’re looking for a way to invest your money and turn a good ROI, any financial expert worth their salt will not advise renovating as the way to do it. There are many other routes to invest your money, like putting money into the S&P 500, for example, that will give you a better return than a home renovation.
The reason why ROI is such a big factor in home renovations is that remodeling is the only method of investing where you get two means of value: you can get the ROI, and the greatly improved quality of life with a new space in your home.
For example, when you purchase a car and get repairs, you’re spending money on a depreciating asset. You’re putting money into your car and you won’t get back a single dollar.
When you purchase and renovate a home, you’re putting work into an appreciating asset - and chances are some of that money will stay with you! But there are still better ways to invest if that’s your number one priority.
So while ROI is exciting and important, it should not be the end-all-be-all of your project.
‘Type of project’ is one of the biggest factors in determining your renovation’s ROI. While obviously the other factors like timing, market and location will make a difference too, there are some common projects that generally provide a better ROI than others.
In general, projects that add functional space and square footage add the most value.
But let’s break that down even further for some of the most common home renovation and remodeling projects:
1. Remodeling Kitchen & Bathrooms
As the two most utilized spaces in a home, investing in these rooms makes sense for both ROI and quality of life.
In some of the hottest housing markets, that means a return of 100% or more of the renovation costs.
These spaces are functional, filled with appliances and a necessary piece of every home - which means that they’re useful for any future buyer, no matter what.
However, this high ROI does not ring true if you’re completing a renovation that is purely aesthetic, using luxury materials and finishes, or creating a kitchen that’s far outside the norms for your neighborhood.
Expert Tip: If you stick to a moderate kitchen or bathroom renovation, and your home actually needs an update, you can get a great ROI.
2. Finishing the Basement
High-income buyers value a finished basement, according to a study by NAHB.
On average, finishing this space will provide 70% ROI, meaning you can increase your property value by $700 for every $1,000 you spend.
With some drywall, flooring, and paint, this space offers more heated square footage, which can bump a home into a different price bracket.
Expert Tip: Adding functional space to your home is always a surefire way to get a good ROI when you’re doing renovations, and more homeowners in high-income areas expect basements to be functional, livable areas.
3. Upgrading the Curb Appeal
In addition to enhancing the beauty of your property, certain upgrades also help improve your home’s efficiency and security.
Overall, projects that involve exterior improvements - from new windows, roofing, and siding to painting and landscape maintenance - can result in 80% ROI.
One reason for this is that “curb appeal” is the first thing home buyers notice when they see a property - even if they don’t go inside.
Expert Tip: A general rule of thumb for top ROI projects: adding more functionality and square footage will add value.
Which Home Improvements Give the Worst Return on Investments?
Generally, any home improvements that are purely aesthetic and outside of the norm for your neighborhood will give you a worse-than-average ROI.
Luxury, entertainment, and aesthetic upgrades
Luxury entertainment upgrades probably won’t give you a great ROI because they’re not necessary for all future homebuyers, and they’re also heavily based on personal preference.
What do we mean by this?
- Pools/hot tubs
- Renovations with unusually expensive materials
- Luxury or upscale kitchen/bathroom designs
- In-home theatres
- Backyard sports courts
- Other highly specialized spaces, like wine cellars or home movie theatres
The only exception is if you live in an extremely high-income area. Then it’s possible that some of these spaces will be expected or common for homes and the ROI won’t be as low.
However, if you live in a low-income or medium-income area, these spaces will provide little to no ROI, because future home buyers will not be willing to pay for them.
Expert Tip: A general rule of thumb for bottom ROI projects: purely aesthetic or entertainment-based upgrades with no extra square footage will not add value.
For example, if you’re redoing your kitchen and picking out luxury materials, finishes, and appliances - there’s a good chance that the person purchasing your home in the future may not like these choices more than their more moderately-priced equivalents.
Renovation Return on Investment Chart 2023
Another factor that impacts ROI with renovations is timing. Depending on the month or year, certain renovations can provide more value than others.
For example, after the pandemic, more homeowners value functional outdoor spaces - like backyards, porches, decks, and patios - because of the safety and distance they offer when people are sick.
According to Remodeling Magazine, this is the average ROI for these 22 common renovation projects in 2023:
|Project||Job Cost||Resale Value||Cost Recouped|
|HVAC Conversion | Electrification||$17,747||$18,366||103.5%|
|Garage Door Replacement||$4,302||$4,418||102.7%|
|Manufactured Stone Veneer||$10,925||$11,177||102.3%|
|Entry Door Replacement | Steel||$2,214||$2,235||100.9%|
|Siding Replacement | Vinyl||$16,348||$15,485||94.7%|
|Siding Replacement | Fiber-Cement||$19,361||$17,129||88.5%|
|Minor Kitchen Remodel | Midrange||$26,790||$22,963||85.7%|
|Window Replacement | Vinyl||$20,091||$13,766||68.5%|
|Bath Remodel | Midrange||$24,606||$16,413||66.7%|
|Window Replacement | Wood||$24,376||$14,912||61.2%|
|Roofing Replacement | Asphalt Shingles||$29,136||$17,807||61.1%|
|Grand Entrance | Fiberglass||$10,823||$5,457||50.4%|
|Deck Addition | Wood||$17,051||$8,553||50.2%|
|Roofing Replacement | Metal||$47,414||$23,163||48.9%|
|Bath Remodel | Universal Design||$39,710||$18,270||46.0%|
|Major Kitchen Remodel | Midrange||$77,939||$32,574||41.8%|
|Deck Addition | Composite||$23,430||$9,325||39.8%|
|Bath Remodel | Upscale||$76,827||$28,203||36.7%|
|Major Kitchen Remodel | Upscale||$154,483||$48,913||31.7%|
|Bathroom Addition | Midrange||$57,090||$17,237||30.2%|
|Primary Suite Addition | Midrange||$157,855||$47,343||30.0%|
|Bathroom Addition | Upscale||$104,733||$27,830||26.6%|
|Primary Suite Addition | Upscale||$325,504||$73,875||22.7%|
Short term value vs. long-term value
One important thing to note is short-term value vs. long-term value when thinking about ROI.
Projects that are adding functional space and square footage - like additions, finishing the basement, or making moderate upgrades to appliances - are value-adds that will stand the test of time, because they do not rely on design trends.
These types of projects add “long-term value.” For example, if you’re adding a bed and a bath to your home (and this addition won’t take it outside of the norm for the neighborhood), this renovation will be useful to homeowners now and in 50 years.
But other renovations, like new kitchens, will add “short-term value,” because in 20 years any aesthetic improvements made could be out of style.
For example, giving your kitchen a farmhouse, all-white style renovation could greatly boost your home’s value in a hot market within the next 5-10 years.
But if you’re not planning on selling for another 20 years - this design style could be seen as negative, and out of date, by homebuyers. Thus - the value of this upgrade only holds up for so long. Think about your mom’s pink bathroom from the 80s. At one point it was the peak of style. Now, you’d struggle to sell that without re-doing it.
Expert Tip: This is why as renovation loan experts we don’t recommend making ROI your biggest motivator when it comes to kitchen and bathroom renovations - because your style preferences might not be “in” in thirty years.
You should make your quality of life your top motivator for your remodel, so you can make choices based on your family’s needs when it comes to renovation style.
Just because an open floor plan might not be the hottest new layout, that doesn’t mean it won’t be awesome now for you and your family.
Is Renovating a Good Investment?
Any financial advisor will tell you that there are a lot of smarter and easier places to invest your money and get a better return. But renovating your home is a really unique investment because it kills two birds with one stone: it improves your quality of life, and adds value at the same time.
Your home is an appreciating asset - and therefore it makes sense to put money into it over time to keep it in good condition, especially toward safety hazards, or broken/non-functioning parts.
But - renovation, solely as a means to add value, does not make sense and isn’t necessary unless you’re fixing and flipping.
If you’re considering renovation outside of adding value though, when you factor in 70-90 cents on the dollar in ROI AND a major improvement in quality of life? It’s genius.
Here are some questions to ask yourself as you’re considering a renovation:
- Is my renovation plan really “trendy”?
- Will these upgrades stay within the bounds of what is “normal” in my neighborhood?
- Is my renovation adding square footage?
- Is my renovation making my house more functional?
- Am I choosing materials, appliances, and finishes that are well-priced?
- Is the main motivator behind this renovation my own quality of life?
- How long do I plan to stay in this house before moving?