Renovations, Ryan, and Real Estate Returns

Posted on Posted in Real Estate Analysis

One of the best marketed concepts in modern real estate is value added. It’s the idea that any capital for renovations put into a home will increase the sales price by the same amount or more. This is the underlying theme behind basically every renovation program ever, and to be honest, great for any business in the real estate sector. Want a new kitchen? You can have it! And I can build it..

As much as it benefits business to accept this concept, it reminds me of a maxim overheard at a Washington, DC bar (earmuffs kids):

“The truth is like poetry, and most people fucking hate poetry”.

Fortunately for home owners, and not so fortunately for my girlfriend, I’m not nearly as cynical nor good looking as the Ryan Gosling character quoting this. Being a custom home builder I have seen the value added concept play out well in some scenarios while completely missing the mark in others. In my personal experience it has been completely dependent on the state of the housing market.

In a booming economy, buyers generally desire a fully renovated product, the thought of fixing a sink is just…ewww. During these times homeowners will get great value added out of quality renovations. Fast forward a few years to down markets and toolphobia has quickly dissipated. Suddenly everyone believes they can renovate their own white house with blue shutters and a big ole porch. In these markets, people seem to avoid the costly renovated properties and aim for the budget fixer uppers.

While the extremes seem obvious, I recently had a potential client ask me:

 “What is the average home value increase from a full renovation project?”

This I did not have an answer for, to get one, I went straight to my Grade 9 math textbook and 2003 version of Excel. I did a fairly thorough analysis for my clients neighbourhood and will write a detailed follow up blog for the true real estate nerds that want the beautiful mind version. For everyone else the answer was essentially this:

Y = $118X + $314; where X = the percentage of the home renovated.

Chart 1 – Increase in Home Value by Percent Renovated

For this particular area, the average non-renovated home price is $314/sqft and the average value added from a 100% complete renovation is $118/sqft.  This means a 1500 square foot bungalow in this area starting at $471,000 will increase to $648,000 from a fully finished, quality renovation. An increase of $177,000 or 37.5%.

While 37.5% is likely on the high end of the spectrum it is safe to say that renovations will definitely provide some sort of return, the cost to get there however, is a whole other high school math formula.

At the end of the day my best advice is this:

If you are going to renovate, do it because you are comfortable with it financially and it will make you happy long term.

With this as your mantra the value will come, one way or another.

 

 

If you have any thoughts, questions, or a neighbourhood you would like analyzed please contact me at jeffr@innovadevelopments.ca!

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