Home improvement projects are considered one of the soundest uses for home equity loans because home improvement is not like many types of spending. Home improvement gives you something back for what you spend -- a return on investment for your home equity dollar. This is because home improvement projects can potentially add to the value of your home. The size and nature of this return depends largely on the type of home improvement project.

Some home improvement projects can allow you to recoup as much as 80% to 90% of the project's expense with an immediate increase in property value. The average project will return 78% of its cost to the value of your home, while other projects recoup less than 70% of their costs. Beyond the immediate return, in a rising real estate market the value of any home improvement projects can have a compounding effect in the years ahead.

Let's look at three ways you can approach getting a return on your home improvement projects.

Adding Appraisal Value

While location and aesthetics are important factors, there are more tangible attributes used almost universally in determining property value. All other things being equal, a 2000 square-foot home will tend to be worth more than a 1600 square-foot one; a home with three bedrooms will tend to be worth more than one with two bedrooms, etc.  

These basic physical changes not only impact the way your home will be appraised when a potential buyer applies for a mortgage, but they will also influence how your home is priced by real estate agents. Therefore, home improvement projects which add square footage to your floor plan can generate a direct return on your investment. There are limits to this -- turning your house into an imposing castle won't add much to your property value in a neighborhood of small tract homes. Appraisers call this "over-improving for the area."

Getting Your Home Sold

A less tangible but still practical return on investment comes from home improvement projects that will help you get your home sold. These include cosmetic projects which add curb appeal, as well as basic repairs and upgrades which eliminate any red flags that could make buyers uneasy about your house.

The return on these home improvement projects may be harder to quantify than on those which add physical features to your home, but they may very well make the difference in how easily you sell your home.

Your Personal Return on Investment

From a practical standpoint, so-called "lifestyle projects" will probably add less to the re-sale value of your home. This type of home improvement project would include things like adding a swimming pool or making your home handicapped-accessible. These are not changes all buyers want or need, so they generally generate a lower return on investment in the form of property value.

On the other hand, if you are planning to stay in your home for a long time, these home improvement projects are ones that might add the most to your enjoyment of the property. In those cases, the financial return on investment may not be as great, but the personal return on investment can make it all worthwhile.

Sources:

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