Every real estate investor tackles home renovations sooner or later.
Materials wear out, home styles change. Home updates are simply inevitable in the lifespan of a property, if you buy and hold real estate for the long term.
As an investor, you naturally want to get the most value for the money you spend on home improvements. But what home improvements offer the best ROI?
Here’s what you need to know about ROI for home improvements, whether you’re a flipper or a buy-and-hold landlord.
The Difference Between Adding Value and ROI
Return on investment – ROI – refers to the percentage value gained on the money you invested. To calculate your actual ROI percentage on an investment, first subtract the total investment cost from the gain on the investment, then divide that number (the profit) by the cost of the investment.
Adding value refers to a higher sale price you may be able to fetch from an investment property due to improvements you’ve made to that property. But just because an improvement adds value, it can still have a negative ROI.
Imagine you do a kitchen renovation that adds $8,000 to the value of your property. But if those renovations cost you $10,000, they have a negative ROI. You actually lost $2,000 on those renovations!
For real estate investors, home renovations typically create revenue in two ways. One of these is added value realized upon the sale of the property, and the other is the potentially higher rent you can charge as a result of the improvements.
Renovations from an investing point of view are different from when you’re renovating your primary residence. Since you won’t live there, you can’t count enjoyment of a renovation as a benefit. Your sole goal as an investor is higher returns: choosing home improvements with the best ROI.
Home Improvements with the Best ROI
You understand the difference between value and ROI. So here’s the kicker: according to Remodeling Magazine’s 2019 report on home improvements with the best ROI, not a single one had positive ROI.
They all add value. But none of them added more value than they cost.
“What are you saying, that I shouldn’t make any home updates or renovations as a real estate investor?”
Hardly. The Renovation report was based on homeowners, not investors. You have unique advantages as a real estate investor – more on these shortly. Here are some of the home improvements with the best ROI, followed by how you can ensure you come out ahead on all of your renovations.
Garage Door Replacement
You’ll find replacing a garage door at the top of nearly every high-ROI home improvement list. A garage door replacement is a relatively low-cost improvement you can make to your property (Bankrate quotes an average of $3,611). It carries a lot of weight when it comes to ROI because even the average homeowner can recoup 97.5% of the cost to install a new garage door, per Remodeling’s report.
The garage door impacts a home’s curb appeal. An attractive, clean, smoothly-functioning garage door makes a great first impression, when prospects first lay eyes on your property.
Installing a new, stylish garage door sends a message to prospects that the property is well cared for. It can also impact heating and cooling costs, so renters and buyers want one that is well-insulated and seals property.
Plus, a shabby or stuttering garage door doesn’t exactly scream “responsible owner” to a potential renter or buyer.
Manufactured Stone Veneer
Another renovation that spruces curb appeal, installing a manufactured stone veneer on the exterior is a popular method for increasing a home’s value. These faux panels are durable, affordable, and look great.
While a real stone exterior addition to a home or rental property can be extremely expensive, you can now find authentic-looking manufactured stone materials that accomplish the same look and feel at a fraction of the cost.
Buyers love the cozy look it lends to a home, and Remodeling’s report estimates to bring homeowners one of the highest ROIs possible at 94.9%.
(article continues below)
Free Masterclass: How to Reach Financial Independence in Under 5 Years
Minor Kitchen Remodel
Unlike the complete gut jobs often seen on HGTV home renovation shows, a minor kitchen remodel is one of the home improvements with the best ROI. In particular, if you’re improving a rental property, you don’t want to spend an astronomical amount on kitchen remodels.
Investors can bring in much more value for their properties by doing less extensive repairs and renovations. Don’t rip out everything from floor to ceiling and add overly high-end finishes. Instead, look for simple improvements such as repainting or refurbishing existing cabinetry, replacing outdated appliances, and installing a new laminate flooring that looks like hardwood. See our list of 7 Hacks to Cheaply Redo Your Kitchens and Bathrooms for more ideas.
These steps will create an entirely new look and feel in your kitchen, making tenants and potential buyers more comfortable, but without the hefty price tag. The Remodeling report found homeowners too are likely to reap greater benefits with a smaller kitchen remodel, estimated at 80.5% ROI.
On the contrary, a major kitchen remodel averages a much lower ROI of 59.7%. Only tackle these in your investment properties if the existing kitchen isn’t salvageable.
Wooden Deck Addition
People want space to entertain and get outside, so adding a deck will appeal to many potential renters and buyers. It adds to the livable space offered by a home.
When your property has plentiful yard space, you can define that space and make it more functional by adding a beautiful wooden deck.
The ROI for homeowners averages 75.6% for a new wood deck. But keep in mind important factors such as the location of the home. If it’s in a colder climate where a deck is only practical for a small percentage of the year, invest your renovation budget better elsewhere.
Siding replacement is tied with a new wood deck for one of the home improvements with the best ROI. Homeowners recoup an average of 75.6% of their costs to install new siding on their home.
Your property’s exterior makes or breaks its curb appeal, your prospective renters’ and buyers’ first impression. Siding sends a message about how well you’ve kept up the property. Older, stained, or warped siding isn’t exactly appealing to a buyer or even a renter – it looks junky.
People want to live in a home that’s loved, so consider new siding if it’s needed. But keep in mind that if the existing siding might only be stained, dirty, or simply an ugly color. Consider power-washing, scrubbing, and possibly painting the existing siding before replacing it!
New Front Door
Sensing a theme here? The curb appeal and first impressions of a house matter when it comes to value.
Like the garage door, siding, and stone veneer, a brand-new entry door can work wonders for the aesthetics of a home. It brings a 74.9% ROI to the average homeowner.
Obviously, the entry door is one of the first things a potential buyer or tenant notices, and if it’s dingy or squeaks when you open it, that’s a big red flag. When we attempted to sell our house recently, the warped front door scraping the floor of the entryway did not draw buyers in. It was a necessity to replace that door.
Consider a new entry door to make your investment property stand out from the rest. Pick something sturdy that will stand up to weather and a lot of use, and make sure it looks terrific and fits the style of the house.
Before shelling out the money for a new door however, look into repainting, re-staining, or otherwise refinishing your existing door. Like siding, if it’s fundamentally sound, you can probably just refinish it for a new look. Be sure to oil the hinges while you’re at it!
Getting a brand-new roof put on your rental house or property may not sound as exciting as a kitchen remodel or adding stone veneer. But nothing ruins the rest of your property faster than a water leak.
Replacing an old roof is one of the home improvements with the best ROI, coming in with a 68.2% average homeowner return for an asphalt-shingle roof. A metal roof is not quite as high, at 60.9% of costs recouped at sale.
Roofing materials vary, as do their typical life expectancies, so check on your roof’s quality and remaining life expectancy when deciding if it’s time for a new roof. Only replace roofs that need it, and simply repair roofs with several years’ good life left in them.
The ROI on bathroom remodeling varies wildly.
For a mid-range bathroom remodel job, homeowners can expect a 67.2% ROI on average, whereas upscale bathroom renovations offer lower returns at 60.2%. If you stick with more universally appreciated styles rather than your personal preferences, you’ll get a better ROI.
Look for ways to create a new look without actually ripping out the tile and fixtures. If the tiles are ugly but in good condition, coat them in a glossy white tile refinish and sealant. If the tub has stains that won’t come out, re-coat that too.
And when you must replace fixtures, leave as much of the existing plumbing in place as possible.
Prospective renters and buyers care about bathrooms. When you list a home for rent or sale, outdated bathrooms with ugly fixtures and an awkward layout won’t attract the highest offers or the best tenants. But you don’t have to spend an arm and a leg, just to create a new look!
(article continues below)
Ways to Boost Your Home Improvement ROI
As an investor or even a committed homeowner, you have plenty of options to boost your ROI on home improvement projects.
Here are some simple tactics to boost your ROI on renovations, and always come out ahead in your investment property upgrades.
1. Buy Fixer-Uppers
One reason why homeowners’ average ROI for home improvement projects is so low is that they make “vanity” renovations. They update rooms or home features because they feel like a new look, not because the property needs it.
A kitchen that hasn’t been updated since the 1960s almost certainly needs new cabinets, new countertops, new appliances, a new sink. A kitchen that hasn’t been updated in 20 years, on the other hand, just looks slightly dated, but still works perfectly well.
One way to find good deals on properties is to buy fixer-uppers, homes that need a little TLC – or a lot. Consider driving for dollars, or using online services to help you find vacant or run-down properties like Deal Machine and Propstream. The needed renovations represent an opportunity, as they already impacted the purchase price and offer the chance to create sweat equity through truly necessary updates.
2. Do the Renovations Yourself
It’s no secret that going the DIY route can save you major money in any home-improvement task. While some jobs are specialized and you should only hire a licensed contractor (think HVAC and electrical issues), you can slash your renovation costs significantly by doing as much of the work yourself as possible.
Most laypeople are capable of performing simple home improvements themselves. Painting interior walls isn’t hard, for example, and freshens up any space. If you’re doing some cosmetic improvements in a kitchen, you could likely sand the cabinets and paint or refinish them in a day or two. If you’re getting new flooring installed, perhaps you’ll be able to rip out old carpeting yourself to save on labor costs.
And if you’re renovating a rental, always aim to tenant-proof the property!
Whatever you choose to DIY, be sure you have some experience or check respected resources to help you prepare and do things properly. YouTube can come in handy as well, since you get visual aids along with step-by-step instructions.
Doing the work yourself won’t be the most efficient use of your time if you’ve got a large number of properties to renovate. However, for a smaller investor with a couple of homes or rental properties, doing some tasks yourself can keep it frugal.
3. Negotiate & Build Relationships with Contractors
Homeowners don’t need renovations done often enough to build deep relationships or negotiate volume discounts with contractors. So they pay full retail pricing.
As a real estate investor, it’s well worth the time it takes to cultivate positive relationships with contractors. You’ll want to know the trusted authorities in various home improvement niches. They can help you weed out folks with shady operating practices or inflated prices.
Use online review sites like Angie’s List to vet contractors and companies, finding out who has the highest ratings in your area as well as whom to avoid. Remember, the best person for a home improvement job likely isn’t your cousin’s brother-in-law’s friend from college. Do your research to ensure you’re hiring quality, trustworthy people to work for you.
Negotiation is also a powerful skill when it comes to home renovations. Home-improvement project prices are not set in stone, so be sure to get quotes from multiple contractors. And don’t be afraid to flex your negotiation muscles with anyone you hire. It can’t hurt to ask for a more competitive rate on work, and it might end up saving you a lot of money.
4. Get Creative and Hack New Looks
This tip goes hand-in-hand with DIY renovations. Many of your projects can come in under budget by using your creativity. Sometimes small changes can make a big difference in the look of a home.
As mentioned previously, in a minor kitchen or bathroom remodel, one popular money-saver is repainting cabinets rather than replacing them. Be sure to pick simple, neutral colors that won’t deter potential buyers. In our older home, simply repainting the dark oak bathroom cabinets white brightened the entire bathroom. You can finish off the look with modern new hardware.
Other renovations can be hacked to save you money. Re-glaze those turquoise floor tiles with a modern finish or color, refinish older bathtubs, or revive tired countertops using a faux-granite DIY kit.
5. Be Patient
Waiting for sales on materials is a great strategy for non-urgent projects, if you have the time. Plus, you can aim to schedule skilled labor during their off-season, so you’ll get a better rate and a quicker turnaround time.
For example, HVAC contractors work long hours during the peak of the summer heat and winter cold. They’re typically booked out for weeks or even months. If you want to skip to the head of the line, expect to pay a premium.
So, have your furnace and air conditioning condenser serviced in the spring and fall. That preventative maintenance will catch issues before they become emergencies, and save you major money and headaches in the long term.
Patience can really pay off when it comes to home renovations with the best ROI. This can be tricky if you’ve got tenants or are in a rush to bring in new tenants, but it’s something to consider when possible.
6. Consider Several Ways to Pay for the Renovations
One option is paying for property upgrades with cash of course. You can and should be setting aside money each month for property repairs and maintenance as part of your real estate cash flow budget. And, of course, you should be including repairs and maintenance as costs when running the numbers on a rental property ROI calculator before you buy a property.
But paying out of pocket isn’t your only option. Depending on the potential increase in asking rents and cash flow, it may also make sense to finance the renovations. Check out these options for financing rental property renovations before writing off the updates as unaffordable.
Just make sure you don’t spend more on interest than you’ll earn in higher returns.
Final Renovation Considerations
As a real estate investor, you need to be efficient with your time as well as your money. Choose renovations that offer the best ROI on home improvements, and only make home upgrades that need to be done.
Your rental property likely won’t need all of the renovations on this list, so figure out what home improvements add the most value in your situation. And remember: there’s almost always a cheaper but equally effective way to achieve a new look in your investment property!♦
What updates have you found to be the home improvements with the best ROI? How do you save money and boost the returns on your renovations? Share your experiences and tips below!
The More You Learn, The More You Earn: