How to Strategize the Financial Side of a Home Remodel

"It'll be fun, and we'll increase the value of the house!" That's what most people say when they decide to remodel their homes.

Well, maybe not the first part. But most homeowners do intend or at least hope to raise their home values when redoing the kitchen, bathroom or some other element of the property. The trick is accomplishing that goal, which is hardly guaranteed. Here are some tips on how to strategize for financial success.  

Picking Your Projects

When it comes to renovation projects that return most of their investment, landscaping, windows, floors and garage-door replacements are high on the list. Other renovations that have high returns on investment include kitchen appliance replacements, bath remodels, wood deck additions and siding replacements.

Generally, higher returns on exterior improvements reflect the power of curb appeal in attracting buyers' interest. In contrast, a major kitchen remodel might fail to generate a high return on investment. One reason why is that a fully remodeled kitchen may be so customized to the taste of the owner that it fails to broadly appeal to potential buyers.

Of course, all projects should be considered in light of the particular circumstances. For instance, adding a bathroom to an older home with a single bathroom likely will provide a greater return than adding one to a home that already has multiple bathrooms. Also keep in mind that remodeling a home so extensively that it moves beyond the price range of the surrounding neighborhood can make it more difficult to recoup your investment.

It's true that highly visible improvements, such as quartz countertops or luxury showers, tend to attract attention. But ensuring that basic plumbing, roofing and other systems are in good working order are usually more critical given that buyers may want to redo the kitchen or bathrooms to suit their own tastes anyway.

Maximizing Your Investment

Any renovation requires an outlay of time, money and energy. To gain the most from your investment:

• ‍Do your research. Gather information on materials and products, the likely timeline, and potential contractors. Decide which parts of the remodel are must-haves and which are nice-to-haves. Create a rough budget that you'll fine tune as you engage contractors and shop for materials.‍
• Consider a general contractor. Managing the job yourself may initially appear to be a money saver. Unless you have construction experience, however, you'll likely spend more time and money doing it yourself than if you hire a qualified, experienced general contractor to oversee an efficient, cost-effective renovation.‍
• Get multiple quotes. Ask to see portfolios of contractors' work, or even better, visit a few projects — including some that are underway. Look into whether the sites appear to be well managed.‍
• Draw up a written agreement. This should include the scope of the work to be done as well as the estimated cost, timeline and payment schedule. Having these in writing can minimize future disagreements.‍
• Allow for contingencies. Recognize that projects can go off track for reasons out of the contractor's control, such as unseasonable weather. Account for this in your budgeting and scheduling. ‍
• Track your expenditures. Investments you make in improvements to your home generally can be added to your cost basis and reduce any capital gains tax liability if and when you sell the home, so be sure to carefully track them. Also, you may qualify for a tax credit for qualified energy efficiency improvements, depending on the work done.

Building Your Happy Place

If you're thinking of remodeling your home specifically to increase its value before putting it on the market, carefully planning the renovation from a financial perspective is critical. Even if you're sprucing up the place for your own enjoyment, you'll want to set a feasible budget and make sure you get your money's worth. Your CPA can help you understand the tax ramifications and assist you with budgeting.