Are you considering a home renovation as a way to increase the value of your propety? There are two ways that you can build value with any real estate investment. The first is through natural appreciation where the value of the property grows over time due to increased demand. Historically real estate has appreciated at a much faster pace than the rate of inflation. In California, real estate has appreciated at nearly 5% annually since the year 2000 which exceeds the inflation rate of about 2.2% over the same period.
The second way to build value in real estate is through forced appreciation. Through investments to improve the property, appreciation is accelerated and a greater return may be had in a shorter time than could be achieved through natural appreciation.
One of the most common ways to ‘force’ appreciation is through home renovation. By making improvements to your home, not only do you create a more attractive, safe, and efficient environment to live in, but you also may increase the resale value of your home. That said, not all home improvement projects are equal when it comes to increasing home value. There are a number of considerations you should take into account when investing in your property.
From years of experience in real estate, as well as from owning multiple homes over the past 20 years, I have some suggestions on what you can do to maximize the value of your home improvement investment while minimizing the headaches of managing projects while living in your home.
The first step in any home renovation project is to determine what you’re going to do. While building that beautiful redwood deck with a hot tub off the garden may sound wonderful to you and your family, it may not provide the best return on investment. There are generally three categories of projects that you might consider: Infrastructure, expansion, and aesthetics.
Infrastructure investments are often the most important things you can do to maintain the value of your home. Foundation or seismic retrofit work, roofing, plumbing, electrical, insulation, and windows are all important areas of your home to maintain. These investments keep your property safe, functional, and efficient. When you consider selling your house in the future, if you haven’t maintained critical infrastructure, it will impact the resale value of your property. While these projects aren’t fun, can be expensive, and don’t provide you with any direct lifestyle benefits, they are important and should be considered at the top of your to-do list when contemplating renovating your home.
Foundation or seismic retrofit work, roofing, plumbing, electrical, insulation, and window replacements are all important infrastructure investments that keep your property safe, functional, and efficient.
Expansion projects involve increasing the usable square footage of your home by finishing a basement for livable use or building a new room. These types of projects can definitely increase the value of your home. If you build a third bedroom on to a two bedroom home, you may grow the value of your home by 20% or more. That said, these projects can be expensive and it is wise to earmark budget of at least $400 per finished square foot of space. While it may be more affordable in other parts of the country, the Bay Area is an expensive market and contractors and other home improvement vendors know this.
The third type of home renovation project is what I call an aesthetic project. These are projects that modernize the style and function of your home, but don’t contribute to improved infrastructure or increase the size of your home. A kitchen or bathroom remodel would be a good example of this type of project. If you plan to stay in your home for many years and have the money, go big and splurge on all the best appliances and fixtures. You’re going to be living in the home for the foreseeable future and you want to enjoy the benefits of the improvements. If you’re planning to sell in the next few years however, you may consider investing slightly less. You can still make some valuable improvements that create a greatly improved aesthetic without breaking the bank.
Financing Your Home Renovation
After deciding which project you are going to embark on, you’ll have to consider how you will pay for the renovation. The first and best option is to pay for home updates through savings. Cash you have on hand is the least expensive form of capital, but many people don’t have the required savings to embark on any significant renovation project. If that’s your situation, you have a number of other financing options.
You can get a home renovation loan to pay for improvements, but these loans come with restrictions. They are typically used to purchase a home and include additional capital to pay for improvements. You will have to make sure you qualify for such a loan and then adhere closely to the guidelines for improvements which include using licensed contractors for the repairs. These loans may also be more expensive than a conventional mortgage or refinancing.
Refinancing your existing mortgage with a cash-out option is another good way to pay for improvements. Depending on the interest rate you can get, refinancing can help you not only generate cash for improvements, and may lower your existing monthly mortgage payment if your original loan was at a substantially higher interest rate.
Another way to access cash from equity you’ve already built up in your property is through a Home Equity Line of Credit (HELOC). This is a line of credit based that can be drawn down over time. Like any collateralized loan or credit line, if you aren’t able to repay the loan, the bank may be able to take your home, so make sure you understand the repayment requirements and costs associated with the loan.
Many clients ask me if they will need an architect for their home improvement project. The answer depends on the scope of your project. Many projects can be done by contractors without needing to hire an architect. For example, if you’re planning a simple kitchen refresh that will involve replacing cabinets, countertops, and appliances you won’t need an architect.
However, if you’re planning to move walls, windows, or make other significant layout changes to your space, you would be well served by getting professional help. This will ensure you don’t do anything to compromise structural integrity. You will also receive help deciding on the most efficient way to configure the new space. Also, many larger projects will require permits and having architectural drawings will speed up the permitting process and increase the likelihood that your contractor doesn’t make major mistakes.
Many people think that architects and designers are the same, but they actually offer different services. Architects deal with the structural considerations of a project while designers deal with the aesthetics. One way to think about it is that architects deal with the ‘How’ and ‘Where’ while designers deal more with the ‘What’. Some architects do offer designer services, but you will often be better served by working with a dedicated designer.
Designers (sometimes referred to as interior designers) can help you envision how you will live in the newly designed space. They can help select paint colors, flooring, tile, fixtures, art work, and other creative elements to enhance the design of your home. Good designers will create mood boards and draft elevation drawings to help you visualize the proposed changes.
Many designers also know where to source quality fixtures, tile, and other materials. They often will also have trade accounts with these vendors which can afford you a discount on your project when working with the designer. While a good designer can have a dramatic impact on the outcome of your home renovation project, many people will choose to take on these responsibilities themselves.
Identifying qualified home renovation contractors can be challenging. Like architects, many of the best contractors are very busy and are less interested in taking small projects. That said, if you plan ahead of time, you should be able to find a professional contractor for your project. Like nearly everything in life, you get what you pay for, so I generally advise my clients not to go with the lowest bid when evaluating multiple contractors. Check references closely and ask the following questions: Is the contractor licensed with liability and workman’s compensation insurance? Did the contractor show up on time? Were they prompt in their communication? Did they complete the work with professionalism? Were they on budget? Were changes to the schedule or scope of the project communicated clearly? Did the contractor have a foreman on site throughout the project or was there a rotating cast of subcontractors?
First and foremost you are looking for a contractor that is a clear and responsive communicator. Many unanticipated issues come up in every project and the ability to reach your contractor to get answers and make prompt decisions is one of the most important services they will provide. You may end up ‘paying more’ in accepting a higher bid from a strong communicator, but trust me, you will end up saving money and frustration in the long-term.
Another related consideration is whether to use a ‘design-build’ firm. This is a company that provides both architectural and construction services. The advantage of this approach is better coordination between the architect and the construction crew. The entire process is typically overseen by a single project manager who knows all of the people at the firm providing the various services. This can yield a higher quality project with fewer schedule and cost overruns and less headache for you as an owner.
The downside of the design-build approach is that you will spend more money. If you act as the contractor for your own project and find and manage individual vendors to provide services, you can complete your home renovation for a much more affordable price. A good question to consider is “what is my time worth?” The other factor to consider with design-build firms, is that if there is no ‘design’ element they probably won’t be interested in taking your project, so this will not be an appropriate path in all cases.
The question of whether to incur the hassle and cost of getting permits often comes up. While many people may disagree with me, as an experienced real estate agent I can tell you that you should almost always get a permit for any significant renovation project, particularly when it comes to expanding the size of your home. There are a few reasons for this practice:
- Value – This may be the most compelling reason of all to get permits for your home renovation project. Any additions to your property that aren’t permitted will not be subject to county assessments which means if you go to sell your home, those expanded areas will not count toward the property value. This means that prospective buyers looking to purchase your home may not be able to get sufficient financing from a bank if the appraised value is much lower than the asking price (which may be warranted by the home size).
- Quality – By getting permits and inspections your contractor will be held to a higher standard. They won’t be able to cut corners to increase their profit as they will be responsible to perform work that meets current safety standards established by your city and state. Also, any contractor who discourages you from getting permits for your project should be avoided. Look to work with people who have superlative ethics and professional business practices.
- Compliance – In the event that a city inspector comes by your job site, you want to be in compliance. You could potentially be subject to fines or having rework. The cost of having to go back and redo work that wasn’t originally permitted is not worth the risk.
- Insurance – Some insurance carriers won’t cover parts of your home that aren’t permitted or counted in the county assessement. If there were to be a fire or other event that cuased damage to your home, you may be responsible for all the repairs yourself.
As an experienced real estate agent I can tell you that you should almost always get a permit for any significant renovation project.
If one of your reasons for investing in a renovation project is to increase the value of your home through forced appreciation, make sure to get a permit!
Though we already discussed likely costs for your project, there are almost always overruns. It is impossible to anticipate every eventuality in completing a project and more often than not things come up that cost more money. The contractor may open a wall and discover dry rot or the need to replace wiring or plumbing. You may decide that you want to splurge for the more expensive appliance of fixture after seeing a proposal from your designer. It’s just not possible to know everything that will come up throughout the project, so I encourage all of my clients to add a 20% contingency fund to their home renovation budget.
I also encourage you to set-up a simple spreadsheet with every item you will need for your project and track links to online merchants where you will purchase each item. Then include a column for the number of units you will need (for example with cabinet pulls you may buy 20 or more pieces), the price per unit, and the total for each item. As you begin planning your project you can summarize the total cost by item and then track when each item has been ordered and paid for. This tracking will also help you hold your contractor or designer accountable for their deliverables and avoid any confusion as to what invoices have been paid and what amounts are due.
If you would like a sample tracking spreadsheet, let me know and I’d be happy to share mine.
Like budgeting, renovation projects invariably take longer than you expect. I would add 20%-25% to your expected schedule to account for delays, rework, and unexpected changes. Weather delays for exterior work are more common during the winter, so take seasonality into consideration when scheduling your work. Experienced vendors will advise you on the expected schedules and most will build in a buffer in order to ‘under promise and over deliver’, but you should add an additional buffer to help manage your own expectations. There’s never a downside if the project is completed ahead of schedule.
Your project might require that you move out of your home temporarily or go without plumbing for a period of time. In these cases you want to have a realistic sense of how long you will be inconvenienced so you can make appropriate arrangements and not get caught short.
It can sometimes be difficult to find architects or contractors for smaller projects. There is high demand for the services of these professionals and they obviously prefer high ticket projects to less lucrative work. Finding good vendors takes time so talk to your friends and family, do research on the web and check sites such as Yelp. Also, I have a large list of preferred vendors that I’m happy to share if you need suggestions for people to work with. Please contact me if you’re interested.
Home renovation projects can feel daunting, stressful, inconvenient, and expensive. While this may be true for the inexperienced, once you’ve been through a project or two it gets much easier. You know the vendors and what to expect. You build a sense for timing and costs, and project management becomes easier.
By taking one project at a time, you’ll decrease the chance of becoming overwhelmed. You’ll also be able to plan your budget for expenditure over time, thus managing your cash flow and not getting in over your head financially.
In the end, you can transform your living environment and financial future with well placed investments. If you take the time to research and plan, you’ll find the time and cost well worth the effort. There’s nothing more satisfying than cooking your first meal in your newly remodeled kitchen, or sleeping deeply the first night you have your seismic retrofit completed. The gratification and peace of mind that comes from the results is, after all, priceless.