How Renovations Impact Your Home’s Value
WHERE IT STARTED… SHOULD I DO A GARAGE RENOVATION?
To do the garage renovation or not to do the garage renovation. That is the question!
For once in my life, I would love to remove my financial analysis and problem solving mentality and just make this decision based on pure joy and fulfillment. Unfortunately, I am the way I am, and the numbers are always the leading factor in my decision making. I know…it’s no fun, but it is what it is.
UNDERSTAND RESALE VALUE
As I began to dig into resale comps across my varying degree of renovations, I was reminded of some key callouts. These are all variables to take into account when purchasing a home, as well as when you are digging into the resale potential.
What are the bedroom layouts within the home? Are there 4 bedrooms upstairs, or are they spread across different levels of the home? Families, appraisers, and realtors rate room sizes and location at different levels when considering resale value.
Is there a price threshold for a home in the neighborhood, with only a 1 car garage?
When looking at homes that have sold in the last 3-12 months, how many homes had 1 bathroom, 2 bathrooms, 3 bathrooms, and 4 bathrooms? Within each of those segments, what were the sold price ranges?
When considering bathroom count, for a home with similar finishes and specs, were the bathrooms full, 3/4 or 1/2 bathrooms?
HOW TO CALCULATE REAL ESTATE VALUE
When reviewing my home’s ROI, I need to take into account the total dollar investment, commissions that will need to be paid out, and my closing costs for the sale of the home. In addition to this, if I were to decide to sell my home within two years of purchasing the property, I would owe what is called capital gains on the profit I make off of the home. As of now, I don’t plan on making a move this year, so you won’t see any capital gains calculations included. I also am not taking into account “holding costs” within my analysis, since this is my primary home and not just an investment. See below for a quick breakdown of my analysis.
Calculation:
Total Investment = Purchase price + Renovation Costs
Buyer Commission = 2.7% x Resale Price
Closing Costs = 1% x Resale Price
Net Profit = Resale Value - Total Investment - Buyer Commissions - Closing Costs
Note: I only have to pay out a buyer commission on the sale of my home because I would be representing myself on the listing side. If you are in the state of Minnesota, a general rule of thumb would be to account for 6% of commissions to be paid out.
WILL MY HOME RENOVATIONS PAY OFF?
Now that you’ve seen a run down of what I’m looking into across all of my renovation scenarios, I figured I would show you my specific examples. One thing to note, resale values is a constant moving target and can fluctuate from month to month. Depending on how the market shifts over time, you will want to be sure to consult a local realtor to get a good understanding of your property’s value. As you will see below, based on the renovations I take on, I’ve broken down what the resale value would adjust to given today’s comps. In 3-6 months, these could look different, but that’s why real estate investing is so exciting! Enjoy!
OPTION 1: DO NOTHING ADDITIONAL
$635,993 (Total Investment) = 535,000 (Purchase Price) + $100,993 (2021 Renovation Costs)
$18,900 (Buyer Agent Commissions) = 2.7% x $700,000 (Resale Value)
$7,000 (Closing Costs) = 1% x $700,000 (Resale Value)
Net Profit = $38,107
OPTION 2: BASEMENT BEDROOM + BASEMENT BATH RENOVATION
$650,993 (Total Investment) = 535,000 (Purchase Price) + $115,993 (Renovation Costs)
$19,305 (Buyer Agent Commissions) = 2.7% x $715,000 (Resale Value)
$7,150 (Closing Costs) = 1% x $715,000 (Resale Value)
Net Profit = $37,552
OPTION 3: GARAGE + BASEMENT RENOVATIONS + ADDITION (LAUNDRY, MUDROOM, 1/2 BATH)
$825,993 (Total Investment) = 535,000 (Purchase Price) + $290,993 (Renovation Costs)
$22,815 (Buyer Agent Commissions) = 2.7% x $845,000 (Resale Value)
$8,450 (Closing Costs) = 1% x $845,000 (Resale Value)
Net Profit = ($12,258)
A big takeaway from all of this is that renovation costs do not translate 100% into resale value upside. Never assume your cost and resale will equal 1:1. With labor shortages, material price increases, and market fluctuations, everything is a moving target and should be drilled down.
Stay tuned to see what I end up doing!
Jen
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