With home prices at record highs, it’s only natural that more homeowners are spending money on remodeling. I’ve personally remodeled three homes and I never want to remodel again!
But for those of you who want to suffer through the pain of remodeling, whether to get a better deal or earn some sweat equity, here are some top down views I have about the process:
- Pay more for quality material since labor cost is relatively fixed
- Get the proper permits to protect yourself from bad workmanship, while also boosting the value of your home through a more comprehensive 3R report
- Expect the overall job to cost 30% more and take 30% longer, but don’t let the contractor know
- Adding livable space is the most valuable type of remodel
- Always speak to the last contractor’s client at the very least
- Great homes have wonderful outdoor space, don’t neglect landscaping
- The value of a remodel fades over a 20-30 year period, at which point a new remodel may be due
- Decide whether you’re remodeling for profit or for personal use
The big question every homeowner has when it comes to remodeling is how much they should actually spend to increase their chances of not only getting their money back, but also making a positive return if you decide to sell.
I believe the #1 remodeling error is spending outside the scope of the home. Let’s discuss a framework.
Remodel Within The Scope Of Your Home
Our master bedroom gut job
Decide whether your house is high-end, mid-end, or low-end. You can make the call based on the value of your house compared to the median home value in your city and neighborhood. If the value of your home is within +/- 25%, it should be considered mid-end. Once you’ve decided what level your house is, remodel based on that level.
There’s a wise saying, “don’t buy the most expensive home on the block.” Instead, buy the cheapest home on the block with the most amount of expansion potential. After all, if the price per square foot to build is cheaper than the current selling price per square foot, you’ve got yourself an easy arbitrage. For example, in San Francisco, you can build for less than $500/sqft and sell for $1,000/sqft in many neighborhoods for a nice 100% gain.
Homeowners tend to overspend on remodeling because they think, “While we’re at it, why don’t we do this too.” This kind of thinking makes the project cost way more than the original plan. Contractors can influence homeowners to do more as well. “The wall is open, might as well install a Tesla charger while we’re at it,” said my contractor once. No thanks.
Revisiting My Last Remodel
My last home project entailed building a 275 square foot deck off my master bedroom while also replacing two, 50-year-old aluminum windows spanning nine feet in width with a 12-foot sliding glass door. I called this project Phase Two when I bought my fixer in 2014. Phase One entailed remodeling my kitchen, updating the electrical, refinishing the floors, painting the entire interior, replacing the roof, updating the plumbing, painting the exterior, and building a new master bathroom.
If you’re living in the house, it’s a good idea to space projects out over time. You’ll have more time to save money so the expense won’t feel as painful. You’ll also get to think more thoroughly about the things you want to be done so there should be fewer remodeling redos/regrets. Finally, if you’re flexible on time, your contractor may give you better pricing because you may be employing him during slow periods.
Because I downsized to a 40% cheaper house, I was stuck thinking in price ranges 50%+ higher for everything. For example, I had to choose what type of sliding doors I wanted. On the lower end was Simonton for $8,000. In the middle, there were Milgard, Pella, and Jeld-wen that cost $10,000 – $12,000. Then there was Marvin and Anderson on the mid-higher end, which I had used for my old house that costs about $15,000. Finally, there was this European brand called Vitrocsa that a buddy had told me about which cost about $25,000.
To make sure I was spending within the scope of my home I went open house hunting in my neighborhood. My mission was to find a remodeled house in a similar price range and observe what type of windows and doors they used.
I stumbled across a house in my neighborhood that went through a one year remodel. It’s 3 bedrooms, 3 bathrooms, and has 1,800 square feet of living space, with a peekaboo view of the ocean on a 3,000 square foot lot. The house had lower-end Simonton doors and windows. The house sold for $1.75M.
Given the listing was comparable to my house, I knew the ballpark range to spend for doors and windows. In the end, I paid a couple thousand more for Milgard sliding doors since the quality and look were better, and the cost to install them was the same.
Before with a couple 50-year-old leaky aluminum windows
Cutting a big hole in the wall and installing a new header for support
End product with some new mid-end sliding doors
Remodeling Price Guide
Rank the importance of each room and assign a remodeling maximum cost based on a percentage of the building’s value. You will get the most return from a medium-end remodel job that appeals to the largest amount of people. Don’t get too eclectic in your tastes.
A lot of people throw out remodeling costs like “$10,000 for a small bathroom remodel,” or “$50,000 for a kitchen.” These figures are meaningless if you haven’t also considered the realistic value of your house. Instead, you must think about your remodeling costs as a percentage cost of your entire house.
For example, let’s say you want to update your kitchen. You can either rip everything out and replace the floors, tiles, countertops, and appliances or you can do all that plus follow your contractor’s suggestion and expand another 100 square feet into the yard “while you’re at it.” How much should you spend?
Let’s say you bought the house for $1,000,000. It has three bedrooms, two bathrooms, 1,800 square feet of living space, and a 5,000 square foot lot. A property’s value is made up of land value and building value. In your case, the split is 50/50. If you include the kitchen, living room, and laundry room, the house has a total of eight rooms. The value of each room is therefore around $62,500 ($500,000 building value divided by 8 rooms). You can consider $62,500 as the max you would ever spend doing anything to a room.
But of course, not all rooms are considered equal. Even though a master bedroom is very valuable, it’s not as expensive to construct as your typical kitchen due to the lack of plumbing, complicated electrical wiring, and installation of appliances. Further, not all rooms are the same size as well. Therefore, you’ve got to therefore make a judgement call on the value of each room based on its size, amenities, and importance to you.
I’ve ranked the following rooms in descending order of value:
- Kitchen
- Master bathroom
- Guest bathroom(s)
- Master bedroom
- Living room
- Dining room
- Guest bedrooms
- Deck (outdoor space less valuable than indoor space)
You may have a different opinion. It’s very easy to build a bedroom, living room, or a dining room. All you need is to frame the room, thread in the electrical, put up sheetrock, mud and sand the sheetrock, paint the sheetrock, put up crown moldings if you wish, install lighting and switches, replace the floors and you are done.
Now I assign the value of each room as a percentage of the value of the building value of the house (not the entire house, although you can if you stay consistent). I’ll use $500,00 in this example.
- Kitchen: 5% = $25,000 with a range of 3% – 10%
- Master bathroom: 4% = $20,000 with a range of 2% – 5%
- Guest bathroom(s): 2% = $10,000 with a range of 1% – 3%
- Master bedroom: 1% = $5,000 with a range of 1% – 2%
- Living room: 1% = $5,000 with a range of 1% – 2%
- Dining room: 1% = $5,000 with a range of 1% – 2%
- Guest bedrooms: 1% = $5,000 with a range of 1% – 2%
- Deck: 1% = $5,000 with a range of 1% – 3% due to size
Realistically, most people are just going to focus on remodeling their kitchen and bathrooms. For bedrooms, family rooms, and dining rooms, the most you’ll do is paint, add crown molding or wainscoting, upgrade the windows, and redo light fixtures. Sometimes you might move a wall.
You can always spend more or less if you like. It’s a personal choice. Just remember to think in percentages and make sure your remodeling quality is in-line with the value of your home.
Here’s an interesting chart to give you an idea of the nationwide average cost of various remodeling projects. As you can see, most projects do NOT recoup their job cost. Further, as time goes by, the value of the remodel declines due to wear and tear and outdated styling.
|
PROJECT
|
JOB COST
|
RESALE VALUE
|
COST RECOUPED
|
|
|---|---|---|---|---|
|
MIDRANGE
Attic Insulation (fiberglass) |
$1,343 | $1,446 | 107.7% | |
|
MIDRANGE
Backup Power Generator |
$12,860 | $6,940 | 54.0% | |
|
MIDRANGE
Backyard Patio |
$51,985 | $28,546 | 54.9% | – |
|
MIDRANGE
Basement Remodel |
$71,115 | $49,768 | 70.0% | |
|
MIDRANGE
Bathroom Addition |
$43,232 | $23,283 | 53.9% | |
|
UPSCALE
Bathroom Addition |
$81,515 | $46,507 | 57.1% | |
|
MIDRANGE
Bathroom Remodel |
$18,546 | $12,024 | 64.8% | |
|
UPSCALE
Bathroom Remodel |
$59,979 | $35,456 | 59.1% | |
|
MIDRANGE
Deck Addition (composite) |
$17,249 | $11,252 | 65.2% | |
|
UPSCALE
Deck Addition (composite) |
$39,339 | $22,171 | 56.4% | |
|
MIDRANGE
Deck Addition (wood) |
$10,707 | $7,652 | 71.5% | |
|
UPSCALE
Entry Door Replacement (fiberglass) |
$3,276 | $2,550 | 77.8% | – |
|
MIDRANGE
Entry Door Replacement (steel) * |
$1,413 | $1,282 | 90.7% | |
|
MIDRANGE
Family Room Addition |
$89,566 | $62,055 | 69.3% | |
|
MIDRANGE
Garage Door Replacement |
$1,749 | $1,345 | 76.9% | |
|
UPSCALE
Garage Door Replacement |
$3,304 | $2,810 | 85.0% | |
|
UPSCALE
Grand Entrance (fiberglass) |
$8,358 | $5,855 | 70.1% | |
|
MIDRANGE
Major Kitchen Remodel |
$62,158 | $40,560 | 65.3% | |
|
UPSCALE
Major Kitchen Remodel |
$122,991 | $76,149 | 61.9% | |
|
MIDRANGE
Manufactured Stone Veneer |
$7,851 | $7,019 | 89.4% | |
|
MIDRANGE
Master Suite Addition |
$119,533 | $77,506 | 64.8% | |
|
UPSCALE
Master Suite Addition |
$250,687 | $150,140 | 59.9% | |
|
MIDRANGE
Minor Kitchen Remodel |
$20,830 | $16,699 | 80.2% | |
|
MIDRANGE
Roofing Replacement |
$20,664 | $14,214 | 68.8% | |
|
MIDRANGE
Siding Replacement |
$14,518 | $11,093 | 76.4% | |
|
MIDRANGE
Two-Story Addition |
$176,108 | $125,222 | 71.1% | |
|
MIDRANGE
Universal Design Bathroom |
$15,730 | $10,766 | 68.4% | – |
|
UPSCALE
Window Replacement (vinyl) |
$15,282 | $11,286 | 73.9% | |
|
UPSCALE
Window Replacement (wood) |
$18,759 | $13,691 | 73.0% |
Remodel More Expensive Homes, Buy Cheaper Done Homes
You might be wondering how do these percentages work for lower median-priced homes? For example, if the building value is only $200,000, will the above percentages still make sense since the cost of a Thermador range is the same as it is in Birmingham as it is in San Francisco?
The answer is that you’ll simply get less bang for your remodeling buck as you’ll be forced to move to the higher end of my suggest percentage range, if not beyond. Therefore, you are better off buying a completely done home at lower price points and buying fixers at higher price points with much more upside.
Just be wary that many savvy contractors will simply raise their prices when working with clients living in expensive neighborhoods. The contractor who built my bathroom said he charges 100% more whenever he works on a Pacific Heights home (one of the most expensive neighborhoods). The homeowners there don’t realize the true cost of labor since they only hang out with each other. They are all getting screwed on premium pricing. Who said having a diverse group of friends doesn’t have its benefits.
The key is to always think in terms of spending a set remodeling amount based on the percentage value of your property. If you overspend on remodeling, you will never recoup the cost, let alone make a return. After a couple decades, you will probably want to remodel again.
The final elements to remodeling are timing and purpose. If the economic conditions are right, then the best time to list your property for sale is as soon as all the remodeling work is done. If you are remodeling your forever home to enjoy, then none of this really matters until it does.
For our next house, we plan to buy a Oahu property that was completely remodeled 3-5 years before listing. We don’t want to pay a premium for brand new construction just like how we never want to pay a premium for a brand new car. In 25 years, hopefully our son will be willing to take on the remodeling project because we sure as heck won’t in our 60s!
The Ideal House Size And Layout To Raise A Family
The True Cost Of Constructing A Luxury Master Bathroom
BURL: The Real Estate Investing Rule To Follow
Readers, I’d love to get your thoughts on how much to spend on remodeling. What are some guides you use to decide how much to spend?
It is so easy to get caught up with the remodeling bug and contractors know this and play on your emotions. You are correct that they often suggest add-ons which pad their bottom line with the phrase, “Since I am already here, or since this wall is already opened up.”
I have done work to my house not with the intent of recouping the cost (I still hope it has improved the value a lot) but to meet my needs and tastes. I figure this is my forever home so make it perfect for me.
Even though I live in a very LCOL area, I know I get inflated prices because of my property. It is hard to hide a 50 foot natural waterfall in your backyard from them as well as the acreage of the property (7.67 acres) so anytime I have someone come out to do an estimate I know that they are probably adding on to the labor and giving me the unfavorable “doctor rate.” A lot of them in fact ask me what my occupation I am in to afford all this right off the bat.
In the end I still come out way ahead than those living in HCOL areas but you do end up paying more for these hidden costs because of how nice your property is.
Thanks for sharing this Sam. Would the suggested numbers change significantly for a house you’re intending to flip vs live in?
I learned something new about sliding doors btw. I didn’t realize they could cost upwards of 15K for a mid range set. Is this due to them being custom for the opening?
Thanks. This is very useful as starting out on renovating my 7th property. This one is in a market I’m less familiar with so I loved your notion of comparability and keeping to the range of your house. Re-sale is so important even if not on the cards for the next 5 years at least.
I liked this “Expect the overall job to cost 30% more and take 30% longer” as I built for a slightly tighter budget range so may go back and look at what I have set aside, just in case I reach these multiples.
Perfect timing on your post!
From my experience it’s cheaper to remodel than to build additional square footage. In my market you can do upper (but not luxury) designed remodels for $50/sq ft while new build is 100-170/sq ft for that same range.
With San Francisco’s prices your analysis makes sense though.
I can get an 8k/sq ft mansion for under 1.5 million on the golf course here to put it in perspective. I imagine the mansion cost 200-300/sq ft to build.
Thanks for this post. We’ll move into our duplex in about a year and it needs a lot of work. Focusing on the kitchen and bathrooms is a good idea. We’ll do that first.
What about finishing the basement? That adds living space, right? We want to do it, but we’ll probably put it off for a while. That job will trigger a big property tax increase, I think.
Joe-
In my area (midwest) and with my life (2 kids under 3) having a finished basement has been AMAZING, and is definitely worth whatever extra I paid for it when buying the house/property taxes. While we still have a lot of toys (too many) in the family room, we have been able to relegate much of the big stuff (play kitchen, little table, train set, etc) to the basement. This way we have much less clutter in the living space. I grew up with an unfinished basement and so thought that’s what I wanted. Thankfully, my wife talked me into a finished basement, although there are some smaller unfinished areas that I use as a workspace (small wood working) or long term storage (ie think christmas decorations). Now, with the finished basement I do have to worry more about water, but I have a good sump pump, back up sump pump and generator (probably overkill) so if something goes wrong, I probably have bigger issues than a little water in my basement.
If you finish the basement, use a drop ceiling. Its not as pretty as a properly finished ceiling but its a) cheaper and, more importantly, b) it can be worked on. As ours is a proper finished ceiling, it has little access points to get at random shut offs and cable connections. However, I can almost guarantee that some day when we have an issue it will not be at or near an access point.
Thanks for the tips. Our current living space is full of toys. It’d be great to relocate all that stuff somewhere else.
I’ll research drop ceiling. I have no idea what that is.
For me, kitchens are a big deal. Additions like mother in law units probably add the most value in my opinion. This multi generation thing is happening which makes the MIL suite sought after. If not that then a passive income in renting or Airbnbing during the summer.
People neglect the yard. If there was a nicely built play structure or swing set then it’s totally a +1 in my book. The other thing is fruit trees!!! Not sure if that’s a remodel but listing agents always bring up fruit trees.
Agree about MIL suites and the yard/garden. You can rent suites to reliable high quality tenants easily in a good neighbourhood (e.g. close to university you can rent to grad students). I always look at the listings for the area and what is featured by the listing agent as that is what will add value or help sell the house later.
Remodeling can be addictive and also so completely overwhelming! Really enjoyed this post! Love your pictures and the table.
A friend of mine bought a total fixer recently and I was secretly saying to myself “thank goodness I don’t have to deal with that stress”. I am however really excited to see her before and after pics! ;D
Knowing your limitations are key. Nobody is going to pay $1M for a house in a neighborhood where every house should go for $250K, no matter how much you sink into it.
I think you make excellent points on when to remodel versus when to buy a finished home.
Because the hourly rate of labor should be fixed on a project, the cost of labor in a low-end remodel represents proportionately more on the total project budget than for a high-end project. For a high-end remodel, the total project budget’s percentage allocated to labor costs should be lower. This creates a lower-cost $/sqft hurdle rate to cross for cost-effectiveness when making the decision to make the house more appealing and would make high-end remodels more effective.
Further, your arbitrage argument also holds more water. If you’ve room to expand or improve the property for a $/sqft cost lower than what you could fetch on the market, by improving the property, you can collect that profit on the sale. Great ideas and guidance for when making a decision to invest in renovations.
As a keen follower of the Oahu real estate market, would love to hear input from you as to what you are thinking is happening there. I monitor it closely and from what I can see the slide is on and in a big way. Even though agents are talking it up, I’m seeing a lot of properties sitting for a long time and many listed are not likely to make the price they were sold at 10 years ago. Do you think it’s going to take the 3-5 year timeframe you are talking about to hit rock bottom? I would not have liked to have bought a luxury condo 5-7 years ago with the resale market full of this type of property as they all rush to the new builds in Ka’ako.
Vicky, fun questions you can ask in the real estate forums and we can discuss as it’s a great topic. I’m trying to stay on topic with the individual posts. Thanks!
I am with you, Sam. I have been through new builds and remodels and major cosmetic updates but would hate to do it again. I begrudge the money as well as it will not increase the value of the property and I’d rather have more travel and fun money. NTL, I still dream and plot what I would or could do to my house, but the numbers do not make sense. I will focus on the cosmetic updates, given that anything structural like adding windows to the basement (ground level) or dormers to the top floor and moving the bathroom to take advantage of the spectacular view are a can of worms. I am gone 6 months a year anyway, so maybe just be gone more.
Talked to a guy going through a kitchen and another room remodel with his family. His contractor has raised the price on a lot of their materials due to the recently enacted tariffs. Specifically items from China. Wonder if anyone else is starting to experience this also?
A year ago, I’ve had in mind that my kitchen renovation would range from $20K to 40$ average cost, and that’s only for minor upgrades. I have wanted to expand my kitchen area sometime in the future, but seeing your chart with the average costs for various house parts renovation, I think I am going to take a back seat and let those numbers sink in. Thank you for sharing that interesting chart that also included resale value and recoup, very informative, indeed!
I love this. I am thinking of tearing down our old detached garage and adding a nice attached garage to help with resale.. what do you thing about that? Would it be a good move?
Bobbie- adollarearned.com
What are everyone’s thoughts on adding a high quality in-ground pool attached to an outdoor living space? $800k and up neighborhood where most houses have a pool but our house does not. Got the house for a great deal and it’s updated interior needs minor upgrades but nothing major. Thus the consideration for an outdoor living / in ground pool idea. Worth the investment (or total waste)?
Thanks for all these great tips on remodeling Sam. I do like your idea of spacing out remodeling projects. I had my kitchen done eight years ago, and I was pleased with the outcome. Next stop for us which is next year is our two bathrooms, and this time we will be hiring a new contractor. The one my sister hired to have her bathroom remodeled.
I love what you did with your bedroom. That’s a great looking bedroom and with a view like that? Adding those doors, added significant value to your house for sure.
Hi Sam. I’m selling a rental property in SF after 12 years of being a landlord and am currently going through the process of selecting what to upgrade prior to sale. I agree with your list…my big dilemma is what to do with the approximately 650K I’m going to receive. Any ideas? Have you looked @ Fundrise?