The return on investment of any renovation project is based on local market characteristics, the condition of the property, the real estate market when the property is sold and the quality of the work performed when rehabbed. Historically and on average, certain projects, such as the addition of a wood deck, kitchen and bathroom upgrades and window replacement, have shown the greatest ROI regardless of the property's location or the state of the residential property market.
For investors remodeling a rental property, the cost of enhancing a property can be recovered not only through sale, but also through the increased rental rates commanded by updated residences. Homeowners, however, need to be careful of which projects they choose to complete, since the potential value gains can only be realized to the extent that there are buyers willing to pay for the renovations.
When considering any type of project, it is essential to make sure that any improvements made are appropriate for the particular type of dwelling and local property area. One mistake homeowners often make is improving their homes well above the average of neighboring houses. Buyers are attracted to particular neighborhoods because of the services located nearby and because houses in that area are trading in that buyer's price range. Although a house improved well above others nearby may still receive the same or more interest than others being marketed, it is unlikely that it will command a premium well above average because of the extra improvements.
Time also will have an impact on the ability of an improvement to increase property values. Structural or design improvements, such as building additions or finishing raw space, will add value for much longer than projects like updates to kitchens and bathrooms or technological improvements, such as new air conditioning systems, because these risk becoming obsolete over time.
The ultimate reason to take on any home remodeling project as an owner-occupant is the enjoyment received from living in an updated home. For those hoping to profit from a remodel as well, there are several sources that will give some insight into expected payback for particular projects. For example, REALTOR® magazine publishes an annual "Cost vs. Value" report that compares the cost of common remodeling projects and shows the payback that homeowners can expect. These payback estimates are based on the residential real estate market fundamentals at the time and the average cost of construction.