The value of real estate tends to increase in two ways. The first is market appreciation. Things like inflation, a growing economy, population growth and trends towards suburban or urban living can drive up the sticker price of homes. Market appreciation occurs over time and can work in reverse. The market crash of 2008, for example, caused depreciation in many housing markets. The important thing to remember about market appreciation is that you, as an individual homeowner, don’t have any control over it.
The second way that real estate appreciates, however, is well within your control. “Forced appreciation” is the value that you add to your property through improvements, which include quality upgrades, updates and maintenance. The great thing about forced appreciation is that you can build on your investment as the market appreciates, but you can also protect your home’s value when the housing market is in decline. Forced appreciation is how flippers and contractors who buy, renovate and sell properties as a business make their money. While fixing up a dilapidated house may be a good way to make a quick buck, why should the instant-gratification seekers make all the money? Homeowners can make even more money than the flippers, while at the same time enjoying their homes by making the right improvements.
Even if people aren’t in a hurry to cash in on their homes, they may be embarking on renovations without really thinking about the long haul. And the long haul is where quality becomes so important. Some people feel that newer is better, no matter what. But there’s an old saying that I like: Only rich people can afford cheap things. In other words, buying inexpensive, poorly made articles means that you will have to replace them often—something only people with a lot of cash are in the position to do. Renovations are much the same. There’s a cheap version of everything out there, but if you opt for the inexpensive but inferior approach to projects, you may not save as much as you would think—you are likely to pay more for the labour (it’s usually more difficult to work with flimsy or poorly made materials) as well as to incur the costs of repair work down the line. What’s more, you can actually erase the value of your home’s equity by taking shortcuts, by constructing things improperly or by doing the wrong renovations altogether. If you really want to gain the most from your investment in your home (and why wouldn’t you?), then you want to make changes that will survive the test of time and be worth something in the future.
The quality of your renovations, however, is not the only key to maximizing your home’s value and to profiting from the money you’ve spent on your property. From my experience renovating and upgrading the properties I’ve owned, I have seen that you can earn back all of your investment—and even turn a profit on your upgrades—if you undertake home improvement in the right way. The “right way” involves three principles. As mentioned, quality counts. That’s the first rule. But the consistency of your space is another essential factor in the equation. If you put a flashy, high-end bathroom into an otherwise dated and neglected home, you can’t expect to fully recoup the reno costs or make a profit on the new work. If, however, that bathroom is complemented by updated, modern finishes and upgrades throughout the house, the whole package is going to increase in value in the eyes of prospective buyers. With home improvements, in other words, the whole is worth more than the sum of the parts.
The third key to maximizing the return you make on home renovation investments is to make sure that your home improvements are in line with the market value of your property. That raises the question: How do you find out the market value of your home? Generally, you don’t have to have an exact number in order to make decisions about renovations. The easiest way to get an idea, therefore, is to check the property listings in your neighbourhood and see what comparable houses are selling for. You may be tempted to use the assessment that your municipal government sends to you with your property tax bill. But this assessment is likely to be on the low side. Their calculation typically leaves out any renos that have been done without permits (like windows or flooring, updated bathrooms, etc.), general maintenance, finishes, landscaping and other aesthetics. The municipal assessment rarely reflects real market values.
If you want a more accurate sense of your home’s worth, you can hire a professional licensed property appraiser. Professional appraisers will look at comparable properties in your neighbourhood and then use a standard-deviation sheet to adjust for the differences between properties. Estate agents will do much the same thing, but they tend to make these kinds of adjustments based on their instincts and previous experience. They can also factor in things that an appraiser might not include in his or her assessment—things like decor and landscaping, or the relative popularity of certain streets or locations, and so on.