Depending on your point of view, your home is your castle, a nest for raising children, your emotional epicenter or all of the above.
Studies show that 90 percent of Americans believe home ownership is the key to realizing the American Dream. Many believe this because they think owning a home is one of the best financial investments they can make. Yet financial history doesn’t necessarily support this view.
The greatest financial advantages of home ownership are the tax deduction on mortgage interest payments, which is like paying rent to yourself, and eventually owning a home mortgage-free. But typically, these advantages don’t compensate for the high costs of ownership, including taxes, interest, maintenance and insurance.
Unless they were able to buy a home for substantially less than market value, most people haven’t made money when selling, according to long-term studies. These studies show that over long periods since the late 20th century, on average there was precious little, if any, appreciation of home values in the U.S. One widely respected source of home price data, the Case-Shiller index, shows that between the mid-1950s and the mid-1990s, when adjusted for inflation, home prices actually didn’t appreciate at all, even without factoring in the associated costs of ownership.
There was astronomical price appreciation in the mid-1990s and the mid-2000s, but the air came out of the market with the housing collapse of 2007-08. After being in the doldrums for several years afterward, home prices are now appreciating once again—but unanticipated market forces could easily turn this around.
Because of these economic realities, buying a home should be viewed as a lifestyle investment rather than a financial one. Everyone needs a place to live, and owning a home is an investment for the stability and well being of your family.
Many who mistakenly view homeownership as being a good financial investment see remodeling the same way. To keep your home from being devalued, it’s important to keep up with essential home maintenance, such as painting, siding, roof work, plumbing and electrical systems. But when they sell, homeowners rarely recoup all the money they spend on remodeling projects.
Nevertheless, there are ways that homeowners can approach remodeling to their greatest financial advantage. Here are some points to consider:
- Energy conservation projects (such as installing insulation) are no-brainers because they reduce your expenses and help upon resale.
- Some projects, such as kitchen re-dos, tend to pay back more than others. Looking at this another way, outdated kitchens can bring down values, especially in upscale neighborhoods of older homes where kitchens are often redone. Many upscale buyers want an up-to-date kitchen but are reluctant to take on a remodel themselves. Thus, an outdated kitchen can increase a home listing’s time on the market, which may lower the ultimate price received.
- Projects shouldn’t expand beyond what’s normal for a neighborhood. It’s foolish to put $50,000 into a new kitchen in a neighborhood where this is a rarity. If a home is worth $700,000, spending this much might make sense to create a kitchen that provides a richer living experience for you and your family.
- If properly done, some less expensive remodeling projects can be advantageous. These include new siding, new windows (especially if they’re energy-efficient), a new front door and a new garage door.
- Remodeling styles have a shelf life. If you remodel when you buy a house, the style and materials used probably won’t be in vogue 20 years later.
- If you’re handy and can do the work yourself, remodeling can deliver a much better return on investment than paying someone to do it—if you have the skills and tools to do a good job. Your costs on some projects can be a fraction of what you’d spend on tradesmen.
All too often, people dissatisfied with some aspects of their homes forgo remodeling for decades but then spend big-time on this when they’re about to sell. If they could have afforded these projects sooner, they may have short-changed their families by waiting.
In buying or improving a home, the key is to exercise discretion based on what your family really needs and wants. This is what investing in a home is all about.
This content is based upon information believed to be accurate by ISI Financial Group, Inc., and is not intended to provide specific financial advice. Always seek professional guidance before making any financial or legal decisions.
