How Much Should You Spend Remodeling A House For Max Profit?

With real estate demand so strong and more people spending more time at home due to COVID-19, there is a remodeling boom. We want to make our homes as great as possible. Therefore, a common question for homeowners now is: How much should you spend remodeling a house for maximum profit?

You don’t want to overspend on remodeling and not recover its original cost. You also want to spend money remodeling the right things so that more perspective buyers will appreciate the remodel. As a real estate investor, the idea is to get the best return on your investment as possible.

You’ve also got to decide between whether you want to remodel with a permit or role the dice without one. It’s already difficult enough to get a quality contractor. Going through the planning department can really be a slow and painful experience.

General Home Remodeling Advice

I’ve personally remodeled four homes before and I never want to remodel again! Remodeling always costs more and takes longer than expected. As someone with two kids and in his mid-40s, time is now too precious for me to remodel. However, for those of you who want to suffer through the pain of remodeling, this post is for you.

Whether to get a better deal or earn some sweat equity, here are some top down views I have about the process.

Best Remodeling Tips

1. Pay more for quality material since labor cost is relatively fixed (paint included)
2. Get the proper permits to protect yourself from bad workmanship, while also boosting the value of your home through a more  comprehensive 3R report
3. Expect the overall job to cost 30% more and take 30% longer, but don’t let the contractor know
4. Adding livable space is the most valuable type of remodel
5. Always speak to the last contractor’s client at the very least
6. Great homes have wonderful outdoor space, don’t neglect landscaping
7. The value of a remodel fades over a 20-30 year period, at which point a new remodel may be due
8. Decide whether you’re remodeling for profit or more passive income 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 home remodeling error is spending outside the scope of the home. The second most common remodeling errors is not having the proper expectations at the start of the project. Let’s discuss a framework.

How Much Should You Spend Remodeling A House?

Decide whether your house is high-end, mid-end, or low-end. Once you make this decision, then you can better answer how much you should spend remodeling a house.

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.

Remodeling Cost By Price Per Square Foot

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.

In general, you want to remodel based on your neighborhood comps. If you live in a median-priced home for your city, you should go with a medium remodel. If you live in a top 25%-priced home in the city, then you should remodel on the high end. And if you live in a bottom 25%-priced home, you should remodel on the low end.

Revisiting My Last Home 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.

Spend Within The Scope Of Your Property Value

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 And After Pictures Of Home Remodeling Project

In the end, I spent about $10,000 remodeling my master bedroom by installing new sliding door windows. Then I spent another $15,000 creating an almost 300 square foot deck. Here’s the cost of building a deck by the way.

In my mind, the home remodel increased the value of my home by over $100,000. The light and extra outdoor space, especially post pandemic, is so much more valuable now. With work from home becoming more prevalent for millions of people, having a deck, a hot tub, and lots of outdoor space is becoming much more valuable.

Home Remodeling Price Guide

Rank the importance of each room and assign a remodeling maximum cost based on a percentage of the building’s value.

When you do a home remodel, you will get the highest 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.

Not All Rooms Are Created Equal

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. When remodeling a house for maximum profits, you must focus on the highest value rooms first.

If you have any budget left, then you can remodel the lower-value rooms. Please note that creating more outdoor space since the pandemic began is huge. Therefore, to the extent that you can create more decks off of living areas, the better.

The Value Of Rooms Ranked From Most Valuable To Least

To do a profitable home remodel, you should spend money remodeling the following rooms in order:

1. Kitchen
2. Master bathroom
3. Guest bathroom(s)
4. Master bedroom
5. Living room
6. Dining room
7. Guest bedrooms
8. 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.

But if you are to remodel for the greatest returns, focus on remodeling your kitchen and bathrooms first. And if you can, try to expand the livable square footage of your property.

Calculate The Value Of Each Room

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.

1. Kitchen: 5% = $25,000 with a range of 3% – 10%
2. Master bathroom: 4% = $20,000 with a range of 2% – 5%
3. Guest bathroom(s): 2% = $10,000 with a range of 1% – 3%
4. Master bedroom: 1% = $5,000 with a range of 1% – 2%
5. Living room: 1% = $5,000 with a range of 1% – 2%
6. Dining room: 1% = $5,000 with a range of 1% – 2%
7. Guest bedrooms: 1% = $5,000 with a range of 1% – 2%
8. 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.

Most Home Remodels Don’t Recoup The Cost

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.

2018 NATIONAL AVERAGES

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 Finished 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. This way, remodeling a house will be more profitable.

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?

Since the pandemic began, it has also gotten more expensive and taken longer to remodel a home. Therefore, the price premium for remodeled homes is likely to continue to expand. Buying a remodeled home to save your sanity might also make you good money too.

Tips for Saving on Home Remodeling Costs

If you’d like to save on home remodeling costs, you can always do more of the work yourself. Just be forewarned, if you do the job wrong, you could experience more costly repairs in the future.

Further, if you are doing your home remodel with a city permit, you may not pass inspection if you don’t really know what you’re doing. The electrical inspection is the hardest to pass. But building and plumbing inspection isn’t a cake walk either.

These five things are a low-risk way to save on home remodeling costs. I wouldn’t do the plumbing, building, and electrical by yourself. You want to pass the multiple stages of inspection on the first try. Once you fail one stage, it may take a week or months to pass again.

Here are some ways you can save on home remodeling costs:

• DIY demolition: You don’t need to be an expert to pound a hammer into the wall and remove all the debris.

• Order and pick up all the finishes: Instead of having the contractor charge you an hourly fee to order and pick up all the finishes, do it yourself. After all, it’s up to you to decide what you like. The contractor is focused on the rough finishes.

• DIY painting. Painting is one of the easiest things all of us can do to save on home remodeling costs. I slowly painted all my bedrooms in the last house I bought while the subcontractors were remodeling the bathrooms and kitchen. Painting is also very relaxing, especially if you put on some music or listen to a podcast.

• Buy used. If you are really frugal, you can buy slightly used appliances for less.

• Skip getting a permit. If you are doing big structural and electrical work, I highly recommend getting a permit. The permit gets inspectors to come out and expect that your project is done correct at every stage. However, a permit also costs money and increases your property tax bill. Your increased property tax bill will equal the cost of your remodel times a percentage. And property tax bills last forever.

When Remodeling A House, Always Think In Percentages

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.

Therefore, here’s a general guideline for how much to spend on remodeling based on the value of your house.

How Much To Spend On Remodel Based On The Value Of Your House

The greater you spend on remodeling as a percentage of your house’s value, the greater your risk of not getting back your remodeling dollars. Therefore, in general, the lower the percentage of the value of you can spend on remodeling, the better.

The amount of money you spend on your house for remodeling also depends on the purchase price of your house and the comparable properties in the neighborhood.

Fixer-Upper: Spend up to 50% of the value of your house on remodeling. If you bought your fixer for $500,000, you can spend up to $250,000 remodeling if comparable properties are selling for at least $750,000.

Normal Condition: If your home is in fine useable condition with 20-40-year-old bathrooms, aim to spend no more than 20% of the value of your house. In other words, if your house is worth $1,000,000, I would spend more than $200,000 remodeling your house, if comparable properties are selling for at least $1,200,000.

Great Condition: If your home is recently remodeled, but you’re trying to make it nicer, I would spend more than 5% of the value of your house on further remodeling. If your house is worth $2 million, spending up to $100,000 on building a deck, installing a hot tub, getting Toto Washlets, changing fixtures and appliances, and painting the house is fine. But you aren’t getting a lot of bang for your buck if your house has been recently remodeled.

Economic Conditions Matter

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!

Invest In Real Estate Passively

Remodeling a house can be a real pain. Not only is there the cost of remodeling, there’s also the cost of permits, cost of stress, and the cost of time. After doing so many home remodels since 2005, I no longer want to remodel for profit anymore. I’ve got two little kids to take care of now and I want to earn passive income.

Investing in REITs and private eREITs are my favorite way to profit from real estate today. If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today.

Fundrise are the pioneers of diversified eREIT funds to provide focused, yet diversified real estate exposure across the country. For most investors, investing in a diversified real estate portfolio of high quality commercial properties is likely the best way to go.

Look Into Passive Real Estate Investing

My favorite real estate investing platform is Fundrise. Fundrise began in 2012 and now has over 350,000 investors and $3.5 billion in assets under management. The platform offers funds that focus on rental properties in the Sunbelt, where valuations are lower and yields are higher. For most people, investing in a diversified fund is the way to go. You can start with just $10.

If you are an accredited investor who is bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities.

Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America. Diversifying your real estate holdings is a great idea, especially as the housing market is predicted to remain strong for years to come.

I’ve personally invested $810,000 in real estate crowdfunding so far. Real estate crowdfunding now makes up roughly $75,000 of my ~$300,000 a year in passive income. To be able to take advantage of the real estate market and earn income 100% passively is my ideal situation.

How Much To Spend Remodeling A House For Max Profit is a Financial Samurai original post. I’ve been remodeling homes since 2003 and writing on FS since 2009.