Understand how renovations impact resale
Setting realistic expectations can make a big difference in your plans. The first step is to understand the amount you can expect to recover on your intended renovations. Generally speaking, key factors include what you spend on the upgrade and its quality level, the value of your home, the value of the homes in your neighborhood, the local housing market, and how soon you sell after making the improvements. Imagine how you could structure a project differently knowing you'd recoup at least 75% of it, versus not being sure you'd make back any of your expenditure at all. Here are a few examples:
In the first scenario, let's say you spend $20,000 on a brand new kitchen, complete with new countertops, sink, hardware, and appliances. Then the next year you spend $10,000 on a bathroom overhaul. You've now spent $30,000 in total upgrades that you can expect to recover at a reasonable rate. For the kitchen, factor in a recovery of 62% to 80% of what you spent, or $12,400 to $16,000, plus the bathroom's improvements at 59% to 65%, recouping $5,900 to $6,500, respectively. This results in a home sale price that could be around $18,300 through $22,500.
In the next scenario, let's say you've chosen to appease your inner child with a new $50,000 swimming pool. Many financial professionals advise homeowners not to expect to recoup the money spent on pools because a fair percentage of buyers don't want to deal with all the ongoing maintenance and hassle of caring for a pool. (Of course, your backyard oasis could be the tipping point in the purchase decision for buyers who've just finished watching Pool Kings or Ultimate Pools.) That being said, some financial professionals suggest you might recover 10% to 40% of what you spend on a pool, tacking $5,000 to $20,000 onto your home's selling price. It's not even close to a total recovery, but the idea is your family would gain plenty of enjoyment over the years before you sell.
In a final scenario, it is worth illustrating that your renovations should be largely on par with the status of your neighborhood's home value. While you don't want your home to be left behind in upgrades, you certainly don't want to leave the Joneses in your dust either. By way of example, your dream $80,000 kitchen upgrade probably doesn't belong in a $150,000 home, especially where all the other homes on the block have contractor grade kitchens. A $230,000 home listed in a cookie-cutter $150,000 neighborhood probably won't command the full amount you've spent on upgrades. Instead, a more modest improvement worth around $15,000 to $25,000 would help your home to stand out for the right reasons while effectively increasing the sale price by roughly the same.
What you can do next
It's easy to let remodeling fantasies take you off the rails, but if you budget well and plan sensibly, you can upgrade your living quarters well—and boost your dollars once you sell.