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‘Improvement Rates of Return’ Explained

May 4, 2017

Buyers are willing to pay a little more on a home that has had improvements. However, not all renovations are created equal. Some bring more value to a home than others. Calculating the rate of return on an improvement tells sellers which upgrades bring the most bang to a buyer’s buck.

Understanding Rate of Return or ROR

In finance, a return refers to any profit made on an investment. It also refers to all changes in value, interest, or dividends, as well as other cash flows received from the investment. When profit is lost it is described as a negative return.

Rate of return refers to the gain or loss of an investment over a specified time period shown as a percentage of the investment’s cost. ROR is typically counted in a year,  in which case it is referred to as an annual return.

It can also be defined as income received in addition to all realized capital gains upon the sale of an investment.

When it comes to home improvement, we want to pick projects that will ultimately add more value to the property and lead to better profits. Which renovations will buyers like and pay more money for?

Rather than leaving it up to chance, we can use rate of return to see how much we stand to earn by comparing similar projects. The formula for calculating rate of return is as follows:

Rate of Return = (Final Asset Value – Initial Asset Value) ÷ Initial Asset Value

Remember to multiply the decimal by 100 to make it into a percentage.

Let’s say we had to choose between a new backyard patio and a bathroom addition. Which one would be the better choice?

A backyard patio would cost $ 59,271 and would sell for $ 44,474 while a bathroom addition would cost $ 50,019 and would recoup $ 45,000.

Let’s compute:

  • Backyard patio

Rate of return = ($ 44,474 – $ 59,271) ÷ $ 59,271
-$ 14,797 ÷ $ 59,271
-0.249 x 100

  • Bathroom addition

Rate of return = ($ 45,000 – $ 50,019) ÷ $ 50,019
-$ 5,019 ÷ $ 50,019
-0.1003 x 100

Even though both show negative returns, the best pick would still be the bathroom addition.

Home Improvements with the Most Return in 2017

Remodeling Magazine’s 2017 Cost vs. Value report lists 29 of the most popular remodeling projects and their resale value across 99 US markets.

Here are the home improvements that are promising higher ROR in San Diego, California this year:

Midrange Projects

  • Fiberglass attic insulation

Job cost: $1,368
Resale value: $2,413
Cost recouped: 176.4%

  • Basement remodel

Job cost: $82,619
Resale value: $108,125
Cost recouped: 130.9%

  • Steel entry door replacement

Job cost: $1,519
Resale value: $1,857
Cost recouped: 122.2%

  • Garage door replacement

Job cost: $1,962
Resale value: $2,341
Cost recouped: 119.3%

  • Minor kitchen remodel

Job cost: $23,476
Resale value: $28,000
Cost recouped: 119.3%

Upscale Projects:

  1. Garage door replacement

Job cost: $ 3,437
Resale value: $ 4,447
Cost recouped: 129.4%

  • Fiberglass grand entrance

Job cost: $ 8,729
Resale value: $ 8,342
Cost recouped: 95.6%

  1. Composite deck addition

Job cost: $ 44,145
Resale value: $ 41,889
Cost recouped: 94.9%

  • Universal design bathroom

Job cost: $ 18,722
Resale value: $ 17,750
Cost recouped: 94.8%

  1. Wood window replacement

Job cost: $ 20,150
Resale value: $ 19,050
Cost recouped: 94.5%