The 10 most valuable home improvements

By Todd Ballenger, Founder of the National Institute of Financial Education

With commentary from Sarah Susanka, author of Not So Big Remodeling: Tailoring Your Home for the Way You Really Live

When the economy goes up and down, building permits and remodeling activity generally follow suit. So when the economy is at a lower point, like it is today, you can typically get a discount on many home remodeling projects. This is because builders and contractors have free time, which means the power is in your hands to negotiate a better price on house-related improvements.

Yes, the real estate market is showing signs of stabilizing — sales of new homes surged 27% in March¹ and housing values have slowed their decline, even growing in some markets.² But remodeling deals are still out there and you may want to act quickly because, once housing heats up again, building materials and labor costs will also go up.

What can you gain from making improvements to your home?

For one, you may be able to increase your current property value so you'll have more equity for borrowing purposes. Or if you plan to sell your home in the near future, a remodeling project could bump up your sale price. But if you're like many homeowners today, your most desirable outcome may be to make your home more beautiful, comfortable and enjoyable for you and your family, so you can feel content to just stay put.

"In the wake of the economic downturn and the precipitous drop in home values, homeowners are reconsidering what's important," says Sarah Susanka, author of Not So Big Remodeling: Tailoring Your Home for the Way You Really Live. "Instead of thinking primarily of resale, homeowners are making modifications that will allow them to live more comfortably and inspire them every day."

What type of remodeling project should you consider?

Of course, you may have a specific need for your home, such as adding a bathroom for a growing family. This can outweigh making an improvement for value sake. But if you are also looking for ways to increase the value of your home, here's a look at 10 of the most worthwhile home improvements based on the average return on investment.** Also included are the total average cost of the improvement, the estimated monthly payment if you choose to finance the project with a home equity line of credit and the average amount of equity you can gain with the project.

Data indicate that the trend is still headed downward for value return on remodeling projects, as it has over the last seven years due to the trend in real estate prices.³ In 2009, the overall cost-value ratio was an average 63.8% return on each dollar spent. ⁴

Keep in mind that averaging (as opposed to using the "median") can skew costs higher. Let's say, for example, three people remodeled their bedrooms at a cost of $10,000, $15,000 and $50,000. The median price would be $15,000 because half of the projects cost more and half cost less. But the average would be $25,000. These prices include professional labor, which averages about 30% of the cost⁵ — although there can be substantial variations in labor costs, as well as home values and materials, by region.

The "true" value of improvements to your home

Since you can't get a dollar-for-dollar return on your home improvement, it's important to weigh the other advantages. In addition to creating a more enjoyable space, these may include:

Future goals

First impressions are everything. According to the National Association of Realtors, more than 77% of new home buyers start their search for a new house online,⁶ but they won't go near the property if the exterior doesn't look nice. So if you want or need to sell your current house, investing in "curb appeal" improvements that enhance the exterior condition of your home can be especially worthwhile. These types of updates may also help you move the property faster and secure a better resale price.

"I often tell homeowners that although they may not see investing in a property 'facelift' as a high priority in terms of their own needs, when it comes time to sell, this type of improvement can bring in big dividends simply by increasing traffic to the home," says Susanka. "More eyes mean a faster sale and a better price — especially if the interior matches or exceeds the curb appeal of the exterior."

"Green" benefits

Some improvements create a return on investment that isn't seen in the property value but rather energy efficiency. Such improvements may also benefit the environment — especially if you have a home that's nearly three decades old.

According to the Joint Center for Housing Studies at Harvard, existing housing stock built prior to 1983 constitutes over 20% of annual CO2 emissions from fossil fuel combustion.⁷ Certain upgrades can help improve the efficiencies of these and other homes. For example, qualified dual- or triple-paned windows can help save as much as 15% to 20% on energy bills.⁸ Foam-backed siding can provide an insulation boost and also reduce sound transmission, which may enhance quality of life. And upgraded Energy Star appliances, HVAC systems and electronics can serve as "mini remodels" that pay for themselves by reducing utility costs, thus improving cash flow. ?

Now is an especially appealing time to complete these types of upgrades because of the tax credits available through the American Recovery and Reinvestment Act (ARRA) of 2009. The Act offers $4.3 billion in tax credits to homeowners who purchase Energy Star qualified appliances, including central air conditioners, furnaces (oil and gas), heat pumps (air source and geothermal), water heaters and more.

Other considerations

You need to weigh all of the pros and cons of a remodeling project — and have a game plan for financing — before you start. Here are some of the main things to consider:

Longer-term costs .... and benefits

Some projects may have additional future costs, while others can actually save you money. For example, if you're building an addition, you will have to pay the structural costs of the initial outlay and you will also need to furnish the new space, and heat and cool it year-round. Make sure to add these costs into your budget.

"One thing I encourage people to do is to spend part of their remodeling budget on making the existing structure more energy efficient," says Susanka. "First, I recommend an energy audit (usually around $500-600 for an average home), which shows the homeowner which energy-efficiency upgrades they could benefit from. Then they can choose the most beneficial upgrades for their home and implement them over time as budget allows.

Often the upgrades pay for themselves in only two or three years because the home is less expensive to maintain," says Susanka. "Plus, the efficiencies gained from the upgrades will continue for the lifetime of the house, benefitting future homeowners, too."

Property taxes

If the project requires a permit, you can expect the tax adjuster to take an interest in your project. This could lead to a value reassessment and, potentially, increased property taxes.

Time frame

Quality of life is important, but you will also want to balance the reality of life events and consider whether you'll have time to enjoy the improvements. You may also have other higher-priority expenses that will need to take precedence. Your financial advisor can help you evaluate your situation so you can determine what's best for you.

Home equity line of credit

One option to consider to help pay for your remodeling costs is a home equity line of credit. This type of loan may be especially attractive right now considering today's lower interest rates. Your financial advisor can help you explore this option.

Do it yourself (DIY)

Are you handy? Or do you have time to learn some new skills? A major trend in home remodeling is for the homeowner to take on a large portion of the labor on a project. With labor costs typically running around 30% per project, doing the work yourself could significantly lower your overall costs. Or if you're not comfortable completing all of the work (e.g., electrical, plumbing), consider hiring out only those parts of the job. Also, you may want to be your own contractor to further reduce your costs and increase your return on investment.

Property conversion

Here's an interesting option to consider today: Instead of making improvements to your house, rent it out to someone else and purchase a new property that already includes everything you want at a dramatic discount. Many builders and homeowners are trapped with properties that are brand new, but aren't selling in today's buyer's market. You can take advantage of this property abundance, as well as lower interest rates, if you have good credit and are able to manage the expense. Once your tenants start paying rent, you can pay the mortgage and may even be able to take in some extra income.

What to ponder before you pound that nail

Ask yourself these questions to help you determine whether a remodeling project makes sense for you:

• What makes my house feel like home to me?
• What improvements would I need to make to enhance my quality of my life in this home? ?
• Am I willing to invest the time and energy to do the work myself or do I need to hire an expert?
• Am I prepared to be inconvenienced while the improvements are made? ?
• How will I cover the costs?

If you have a clear vision, then it may be time to take on that remodeling project. That means it's time to meet with a minimum of three remodeling contractors to obtain cost and time estimates. And it also means it's time to talk with your advisor about your financing options and how a remodeling project fits into your long-term goals.

In the end, a home improvement may increase your home value for when it's time to sell. But one of the most valuable benefits of this type of investment today may simply be to make your home more enjoyable for you and your family.

"There's a direct relationship between how your house makes you feel and your perceived quality of life," says Susanka. "When a home is beautiful as well as functional, you are far more likely to feel at home in your life. In our world today, that's a value that can't be quantified."