Home Renovation Return on Investment: 3 Returns Nobody Tells You

Download the FREE Three Returns WorksheetCall in and leave a question or topic you would like covered!530-289-6368Everybody wants to know the home renovation return on investment before they build. Almost nobody knows what to do with the answer.Bill Reid, residential construction expert with 35+ years of experience, reveals why return on investment isn't one number — it's three. And until you separate them and rank them for your own life, every design decision in your project is going to be harder than it needs to be.WHAT YOU'LL DISCOVERThe three types of return that drive every home renovation project. Financial return is what the market gives you back at resale. Livability return is what you get from actually living in the improved house — years of mornings in a kitchen that works, space that fits your family instead of fighting it. Functional return is what problem the project solves: the failing roof, the parent moving in, the stairs that stopped working for someone in the house.Most homeowners mash all three into one undifferentiated feeling called worth it. That's the problem. You cannot rank what you haven't separated. And a construction project is nothing but trades. Every single decision from schematic design through the last punch list item is a trade. When the estimate comes back high and something has to give, people cut whatever is easiest to point at — whatever the last person mentioned, whatever hurts least in that meeting. They don't cut according to priority because they never built one.How financial return actually works — and why it isn't what most people think. An appraiser doesn't add up your receipts. They look at recent sales of similar homes near you, adjust for differences, and arrive at a number. They're measuring what the market pays for what you now have. And those numbers can be very far apart.Your neighborhood has a ceiling. There's a price band that buyers in your area have demonstrated with actual closed sales. As your project pushes your home toward the top of that band, each additional dollar converts into less and less value. Push past it, and the conversion stops almost entirely.The technical term appraisers use for overbuilding: super adequate improvement. A super adequate improvement is one that costs more than it contributes because it's more house than the market around it is willing to pay for. And here's the part that ought to stop you cold: super adequacy is classified as a form of functional obsolescence. That's a depreciation term.Knowing your ceiling doesn't tell you to stop at your ceiling. Plenty of people Bill has built for went right past it on purpose for reasons that had nothing to do with resale and everything to do with the life they were building. What knowing your ceiling actually does is tell you the price of your decision. That's the difference between being in the driver's seat and being a passenger.The five questions that give you a ranked priority list. How long are you staying? What problem are you actually solving? Where do you sit against your ceiling? What would you regret — both spending and not doing? And what can you fund comfortably, not just technically?Answer those five, and you have a ranked list: financial, livability, functional, in the order that's true for you. There is no wrong ranking. Someone who puts livability first and knowingly accepts a weaker financial return has not made a mistake. They've made a decision with information. The only bad version is the one where you never ranked them and the project ranked them for you by accident.How to use your ranked list to drive design from the front. Think about what happens in the design development stage — the second step in design where you're getting into details and making big decisions. You're in a meeting, there's a choice, two options, different costs, both defensible. Without a priority, that decision gets made on feel, on whoever spoke last. With a priority, you have a question you can ask out loud: which of these serves the return I ranked first?Why this analysis works before you even buy a property. Every one of these variables is knowable before you sign anything. What does this neighborhood support? What would this house be worth finished? What does the work cost? Bill has watched buyers walk away from properties because the math showed them the ceiling was too low for what they wanted to build. Better to find out in escrow than three years and a construction loan later.The five things you need on the table to do this well. What your property is worth today. What it would be worth when the project is finished. What your project is likely to cost — the whole cost, not just construction