April 4th, 2018
Cost vs. return
One of the most misunderstood things about real estate evaluation is that it is rare to recoup the full value of renovations or cost of new construction when reselling in the short term (under 5 years). So many people seem to think I bought my property for X dollars then I put Y dollars into renovations so my property should now be worth X + Y, but this is RARELY the case.
So what are the most cost effective things to renovate and improve in order to recoup most of the cost, not take an equity hit and make your property more saleable? They are listed below; however, note that it may NOT be the case in every situation or location. These figures are determined not only by years of real estate experience but also by studies (one of the most relevant is Remodeling magazine online, which does an annual cost breakdown of cost vs. value in the U.S.—but we'll have similar figures here in Canada) and other reliable sources. (See end of article for a full list of links).
- Repainting outside and inside 75%–150% (one of the best returns, but make sure that it is not a sloppy job, a bad paint job WILL REDUCE expected resale values. Also keep the colours neutral!)
- Minor kitchen remodelling 80–100% (changing out counter tops for mid-range, refinishing or replacing existing cabinet doors, replacing sinks and faucets, repainting, updating lighting fixtures)
- Major kitchen remodelling 50–75% (redesign of kitchen and replacing all cabinets, changing all flooring, high end stone counter tops and new back splash, new high end appliances, high end sinks faucets, lighting, and above)
- Bathroom renovation or adding a bathroom 50–75% (adding a bathroom if you only have one may not return the full cost but will greatly help in selling your property. Look at minor renovations to add the most return—replace vanity, toilet and lighting, paint)
- Flooring replacement 50–75% (especially removing carpeting, stick with wood, ceramic or easy to clean laminate, don't go high end unless in a high end home. This is an important improvement to help resell faster)
- Replace old doors and windows, garage door 50–75% (replacing the front door adds the most value (75–90%), don't go too high end on these items as you will not recoup as much in resale, sometimes refinishing existing doors will be more cost effective)
- Siding and roofing generally around 75% (depending on how bad or worn the old siding or roofing is)
- Adding living space in basement or attic 60–75%
- Adding a second story 70%
- Patio or decks about 50–65% (although outdoor living space is now highly sought after for many buyers)
- Pools or spas 0–10% (the worst additions for increasing value)
- Landscaping can vary widely 25–100% (in urban areas a green lawn and landscaped garden in great shape are expected; in more rural areas a basic garden or low cost, naturalized garden can work, but in both cases well maintained and impressive first impressions from landscaping are crucial in selling)
- Furnace, plumbing and electrical work. Return can vary widely. Unseen repair or replacements are often overlooked by buyers; they can add value if brought to a buyer’s attention, but often the VISUAL improvements will add more value.
So why don't you get the full cost of renovations returned when you resell? Well, there are a number of factors involved, but to sum up the most important:
- Market value is judged ONLY by comparable sales data NOT by cost, although for insurance reasons you have a different evaluation because then it is about replacement cost. For a true market value for sale of a property, value is appraised by what very similar properties have recently sold for in your immediate neighbourhood (similar being: habitable building space, location, condition, age, number of bedrooms, number of bathrooms, lot size...). So condition is a factor but only one of many that is considered in a property appraisal.
- When you renovate, you remove something that has residual value and replace it with something new, but in doing so you lose any residual value the older thing had (even if it was dingy) and there are labour costs involved in removing the old and installing the new.
- Sweat equity. If you are able to do some or all of the labour involved in renovations (or building new) you will reduce your cost quite dramatically as paid labour will add substantially to the total outlay. So if you only count the material costs you can generally get a much quicker and higher return but don't count on being paid for all your sweat and labour. However if the work is not professionally done or not to code d.i.y's may backfire and actually reduce your value should buyers deem the work to be of unacceptable quality.
- Some things that you choose to renovate do not increase market value because they may just be things that you personally want and like but not something that the majority of buyers are looking for or are willing to pay extra for. This is the difference between subjective and objective added value.
- The state of the real estate market in your area is SUCH an important consideration. In an area where the market is improving only slowly, or even declining, you could actually lose money by selling in the short term even if you do no renovations.
- There is a difference between adding value and adding sale-ability. In other words some renovations add more value while other improvements make your property more appealing, perhaps not adding as much value but helping to sell your property faster.
- There is always added cost involved in buying a property, not just the purchase price: closing costs, land transfer taxes, legal fees, real estate fees, moving expenses and lost income from taking time off, financing and carrying costs and invariably people spend extra money when moving (if not on major renovations then minor fixes and upgrades, paint, landscape, new furniture, appliances...). The general rule is that you should plan to stay in a property for at least 5 years (many call this the magic number) in order to come out ahead and not take a hit.
Flipping properties for profit in the short term is NOT easy
If you are buying a property in an area where the real estate market is HOT – meaning demand is high and supply is low – you may be able to resell for profit in as little as 1–2 years, but even then beware of thinking that you can flip any property and make a profit. Whatever region you purchase in, it is really essential that you have an EXTREMELY HIGH understanding of what areas, locations and which types of properties sell the fastest and the average price ranges if you are looking for short-term resale.
As a VERY broad example, in our region of the Outaouais the average price paid for a bungalow in Chelsea municipality in 2017 was $344,679 compared with in La Pêche municipality where it was $195,003. So it would be much easier to resell a bungalow in Chelsea as opposed to La Pêche where the total of the purchase price plus renovation costs was under $350,000. The same would apply if you were building something new and then needed or wanted to sell in the short term. Keep firmly in mind the average resale value of similar properties in your immediate neighbourhood and do not go too far above that cap.
Having said this, resale in the medium to long term (above the 5 year mark) almost always guarantees a profit, especially for principal residences where capital gains and sales taxes do not apply. However if the real estate values in your area dip you may have to wait longer to resell without losing equity. The rule is ALWAYS KEEP RESALE VALUE IN MIND; although you may not be planning to sell in the short term plans can change very quickly and often people sell much faster than they expected to.