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What Is ROI? Return on Investment, Explained

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What Is ROI? Return on Investment, Explained

If you're thinking of making some home improvements, you will want to understand a concept called ROI. What is ROI? It stands for return on investment how much money you stand to get back on any particular renovation whenever you decide to sell your home.

Were not saying you shouldn't renovate for other reasons, of courselike the sheer enjoyment you'd get out of new soapstone countertops or the addition of a half bath near your home office. But it turns out that certain upgrades aren't just highly valued by you, but by many other people who might pay a premium for them if you decide to put your house on the market. In other words, a lot of that money you poured into renovations could come right back at cha! Read on to learn exactly how much.

How to calculate ROI

A return on investment is calculated using two numbers: the cost of the investment (in this case, a renovation or addition) and the investments gain (how much it will increase your homes selling price).

Lets say you replace linoleum flooring with beautiful oak. The contractor charges you $2,500 that's the cost of the investment. But when you list your home, your real estate agent says you can increase the selling price by $3,000. Thanks, rad oak floors! That's your investment gain.

Subtract your costs from your gains to get $500, then divide that number by the original cost. Ta-da! You've got a 16.7% return on investment. Or, another way to look at it is to merely divide the gain by the cost. In the above example, that would be $3,000/$2,500 = 1.2, or 120%. That's the cost you'll recoup from the upgrade; in this case, you've actually made money, which is why that percentage is over 100%.

Sadly, though, the above example is more fantasy than reality:As much as wed like to think that the money we pour into renovations will come back at us in full when we sell our home, that's rarely the case. According to Remodeling Magazines Cost vs. Value Report, homeowners will recoup an average of only 64% of what they paid for a renovation.

That said, ROI runs the gamut from great (think the renovation equivalent of Apple stock) to abysmal (Bear Stearns during the subprime meltdown), depending on which reno you do. So, it pays to know which home improvements have the highest ROI, if you hope to make some of that money back down the road.

Renovations with good (and bad) ROI

Determiningwith any degree of certainty which projects will result in good ROI mayfeel likegazing into a crystal ball, but there are a fewtried-and-true guidelines.

  • Energy-efficient modificationspay off. New fiber glass attic insulation is actually the one renovation that will reap you more cash than you cough up, at 116.9%(not to mention savings on your energy bill!).
  • Buyers lovesafety improvements. Installing a steel entry door recoups 91.1% of its cost, and new garage doors will return about 90%.
  • Less is more. In general, lower-cost projects result in better returns. According to Remodelings Cost vs. Value Report,four of the five projects that cost less than $5,000 rank among the top five for money back when you sell. For instance, the renovation with top returns,attic insulation, costs a mere $1,268.
  • Big isn't better. The five renovations that offer the worst return on investment all cost over $40,000. The addition of a master suite, for instance, will run you $245,474 but only add about$140,448 to your homes sale price, recouping only 57.2% of your costs.
  • Smallkitchen changes can have a big impact, like replacing the hardware (new knobs often cost $2.50 or less). Or go big:82% of homeowners prefer wood floors in their cooking area. A minor kitchen remodel will return about 83% of its cost (and think of all the great meals you'll make).
  • Skip the majorbathroom remodel, which only earns back 65.7% of the cost, to focus on smaller projects. For a few hundred bucks, a modern sink will make the entire place look sleek. And ever-popular subway tiles only cost about 21 cents each.
  • Curb appealcan add 28%to your homes value. A tree sapling costs $10 and can add up to $10,000 to the value of your home. But skip the swimming pool, which recoups only 39% of its cost.

Want more info? Contact Jonathan Hawkins today at (714) 625-5287 orjhawkins@amaviproperties.com

Contributions by:By Jamie Wiebe via www.Realtor.com