When it comes to remodeling your home, your bathroom is one of the places to remodel that can bring you substantial equity value, or return value on your investment (ROI). But beware of overspending.
As with anything, if you spend too much on the remodel you will be dipping into any increase in value you might have had if you had stayed within the budget.
It can be difficult to understand the concept of budgeting and understand how to think of our homes as investments. This is mainly because we tend to think of our homes as "our homes" and not as "one our investments."
It is, however, a simple concept. You buy something, you improve it, you sell it for more than it's worth or keep it and it holds the extra value until you sell or pass it on later. This is true for homes as long as the market is favorable at the time you sell.
The confusing part people have trouble with is when they don't intend to sell it or plan for it to be sold at some point in the future. Many people buy a home and want to live there forever. But things do change and it's important for us to make sure for our family's sake that we make a profit out of the deal if we ever do have to, or want to, sell our home.
This will mean that when making repairs, doing home remodels, or deciding whether to repair or replace the systems in our home, we are making the right choices for the long run that won't overspend any extra amount we could make from selling the home.
In the long run, you want your home to have equity when you sell. Equity is the excess value of your home. You paid a certain amount for it. You will sell it for hopefully more. The amount in between, your profit (hopefully not a loss) is your equity until you sell.
One great thing about equity is that you can borrow against it. If you need home improvements or to send your child to college, the equity is there as an asset for you and your family. Equity sits in what is pretty much an imaginary account until the property is purchased by someone else and the $ figure becomes real money in your hand when it's sold.
Here are some things you will need to ask yourself when planning a bathroom remodeling project:
- Will the repair, remodel, or replacement bring value to the home?
- How much value will it bring if I remodel?
- Or will it be dipping into the value of the home because you are overspending?
Let's say you decide to remodel your bathroom. It's a master bathroom, so it will take a little more money to remodel than a regular bathroom. Let's say the remodel can cost just under $6,000.
If your home is currently worth $150K and you purchased it for $150K then you have no equity. If you spend $6K on improving it, the value needs to go up 6K as well or you will be losing money when you sell.
On the flip side, if your improvement cost 6K and the improvement brings 15K in value (you can sell your home for $165K because of the improvements in the bathroom), then you made a 9K return on investment. The 9K is basically part of your equity now.
But how do you figure out what monetary value an improvement will add to your home?
A professional real estate agent can come and do a market value assessment for your home. Many will do this for a reasonable cost or no cost, depending on how bad they want your future business.
They should look at your home personally to see all the features or improvements that will impact the selling price.
Getting a market assessment should not legally obligate you to anything with the real estate professional, so beware of any that try to coerce you into doing anything you aren't ready to do.
You can tell them you are considering selling and want to know the market value or that you are considering an improvement project and need to know what the top equity value of a bathroom remodel would be so you don't overspend on the project.
There are also some figures and other various information sources available on the internet if you do a little research about the current value of your home and what basic bathroom remodeling or renovations would add to a home.
With this information, you should be able to determine ball-park figures or ranges of figures to help you figure out your budget for the improvement.