Here’s why real estate is staying strong despite the pandemic
I got the bright idea of expanding my backyard deck this summer. Why not? COVID-19 has made our home the centre of our universe. Besides, the addition is being partially financed by all the money we’re saving by not going out – and it should appreciate in value along with the red-hot housing market.
But when I went to my local lumber yard I was told the pressure-treated two-by-sixes I need for the project are not available for the foreseeable future due to extremely high demand and production shutdowns. Turns out I’m part of a massive wave of homeowners with the same idea; whether it’s building a deck, fencing, a home office, or a home theatre for the coming winter.
Financing a home renovation as the supply chain resumes is a tough call considering demand keeps driving up the cost of building materials and contractors are charging top dollar. In theory, the extra costs should be recouped through a higher price for the entire home when it is sold. The promise of rock-bottom interest rates for many years ahead also makes it an opportune time to finance any home renovation project through a home equity line of credit (HELOC).
Of course, any potential payback from home renovations depends on many things, including the type of renovation. The Appraisal Institute of Canada breaks down returns on renovation investments into three categories:
1. Renovations with the highest return on investment
- Kitchen and bathroom renovations or updates result in an estimated return of 75 cents to a full dollar for every dollar spent. Much depends on the specific renovation, but adding a kitchen island, for example, returns roughly 65 cents on the dollar.
- Repainting the interior or exterior of a home in tones with wide-ranging market appeal can also pay off. A tasteful paint job, inside or out, yields 67 cents on the dollar.
- Energy-efficient projects return 61 cents on the dollar but have the added advantage of generating immediate savings on your energy bill. The best returns come from heating system upgrades such as furnaces, windows and insulation.
- Returns vary but remain significant from updating décor: lighting and plumbing fixtures, counter tops, replacing worn flooring (vinyl or carpets) or refinishing hardwood floors.
- Decluttering by removing all excess items to showcase the features of your home can be inexpensive but yield a high return.
- The breakdown found hot tubs, swimming pools and skylights have the least impact on resale values.
2. Renovations with the highest enjoyment value
- The enjoyment value of a renovation is hard to measure in normal times. The threat of a prolonged pandemic makes it even more difficult when you factor in the sentimental value of the concept of home as a secure environment. Regardless, the Appraisal institute finds basement finishing, garages, sun rooms, additional decks, fences and landscaping provide the most enjoyment.
3. Renovations that maintain the most worth
- Technically, maintaining a home is maintaining its worth, but if the worth of the property is rising, maintenance can be seen as an investment. Replacing the roofing, updating the heating/cooling system, replacing windows and doors, updating electrical (panel, wiring, sockets, fixtures), and repairing structural defects top the list of maintenance projects.
The Appraisal Institute advises homeowners to hire trusted professionals with references, and points out paybacks can be higher if you do the simpler jobs yourself.
They also caution homeowners to consider their neighbourhoods and avoid “over-improvement” when planning a renovation project. Some projects may only be partially recognized by prospective purchasers in certain areas. As an example, a $65,000 basement project will not be fully appreciated in an area where homes generally do not exceed $250,000.
The Institute says over-improvement can be avoided by hiring a professional appraiser.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email firstname.lastname@example.org.