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Remodeling returns: These projects pay you back big

CNBC logo CNBC 6 days ago Diana Olick

Today's housing market is leaner, pricier and more competitive than ever – and that has more homeowners deciding to remodel rather than move. Home renovation is a booming business. The choices for upgrades are endless, but some offer a far better payback than others.

Just a year ago, more expensive renovation projects were considered more valuable when reselling the home, but that has changed. There is strong and growing demand today on the lower, more affordable end of the market; that is where the real shortage of listings lies. Fancier homes with high-end finishes are more plentiful and in less demand.

"If you spend lots of money to upgrade with the idea of selling, you may have a bit of a challenge because you're pricing yourself out," said Craig Webb, Editor-in-Chief of Remodeling Magazine, which just released its annual "Cost versus Value" report. Researchers there estimate the cost of specific projects in specific housing markets and then survey local real estate agents, asking them to estimate how much higher a home's selling price would be if the project were complete within a year of the sale.

"Last year, the big ticket items rose more in value than the smaller ticket items in terms of the payback. We think the reason why they've changed is a general belief by Realtors that the more you spend on a house the harder it is to sell it," added Webb.

This year, the renovation offering the best return is a new garage door, according to the report. It is low cost on the front end, but offers 98 percent return on investment when factored into the resale value of the home. Second is manufactured stone veneer, returning 97 percent of its initial cost in resale. Front door replacement, especially steel, rounds out the top three.

Others offering great returns are deck additions and minor kitchen remodels, not the fancy chef's kitchen with the double dishwashers and a see-through Sub-Zero refrigerator. In other words, the least sexy upgrades offer the best returns.

"Sexy is subjective. You may want to produce the kitchen of your dreams and make it look just like it did when you were watching the Brady Bunch growing up. The next person may come in and look at all the thousands of dollars you spent and say, 'I hate this,'" said Webb.

The value of all renovation projects this year actually fell, because the cost side of the analysis rose. A severe labor shortage, combined with extraordinary demand for building products, especially after multiple natural disasters, have caused remodeling prices to skyrocket. The simpler the project, and especially one utilizing less labor, the higher the returns.

That is why homeowners are likely to get more value from upgrading their current space, rather than adding onto it. Fancy master bedroom suites actually have one of the worst returns on investment, despite the added square footage.

But that doesn't really matter to Washington, D.C. homeowner Emma Chanlett-Avery. She and her husband are remodeling their Washington, D.C. home, enlarging their current kitchen, adding on a family room and a master suite above the addition. They moved in five years ago, and they want more space for their two young children. Cost versus value wasn't really a driver in their design plans.

"It was a balance because we always had the possibility of resale in mind, but we think we're going to be here for a while so mostly we were focusing on things that would make our life here with our family better or more comfortable," said Chanlett-Avery.

And that is a common theme, as homeowners now are staying in their homes longer than they have historically. Part of that is an outgrowth of the housing crash; people are simply more conservative when it comes to buying big and leveraging big to do it. They are also aging in place, staying closer to children and grandchildren, rather than moving away to traditional retirement communities. A home that may have been designed for a young family is now being remodeled to accommodate elderly parents.

"Working with a client for the first time, the first question I ask is how long do you plan on living in the house because living there is going impact what you do," said Justin Sullivan, president of Impact Construction, which is doing the Chanlett-Avery project. "If you're just going to live in a house for five years, you're going to get 50-60 cents on the dollar. if you live in the place for 10-15 years and raise a family, you're still going to get money back plus the intrinsic value of living there, enjoying the additional space."

Sullivan disagrees with the study's finding that additional square footage is not as valuable as existing upgrades.

"I think it depends on the neighborhood where you live and what it is costing per sq ft. If you look on Redfin [a real estate brokerage] and see properties selling for $400-$500 per square foot, and it's only going to cost $300-$350 per square foot [to build], you can do the math when you sell the place and say we should be at worst even here."

As with everything in real estate, location matters. Square footage may be more valuable in some suburban neighborhoods than it is in trendy metropolitan downtowns. Value is also higher in markets where home prices are appreciating faster. A new garage door offers a 98 percent return nationally but gives back 120 percent in Pacific Coast markets.

Calculating returns is of course most useful if you plan to sell your house soon, but there is definitely value in house pride – living day to day in a space that you designed in a fashion that makes you happy.


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