Home Renovation

Are Renovations an Asset or an Expense?

Renovating the old bathroom or kitchen is an expensive undertaking while upgrading your electrical service might be essential to bring your service up to code. These renovation expenses are part of the cost of homeownership. But are they an asset or an expense?

Renovations to your home might begin as an expense but will increase the value of your asset, which is your home. Therefore, the expense of renovations is actually an investment because you are adding value to your asset.

Investments, such as your home, increase in value over time. You make money simply by making the mortgage payments and staying put for 20 years. Renovation is an investment that can provide an instant boost in your home resale value, so for a full explanation, read on.

Decide Whether to Renovate or Move

Balance your emotional and financial decision with a cost comparison of renovation and replacement, while not ignoring the current real estate market. Are prices going up or holding steady? That’s a question you can answer based on how much you like living in this house.

Let’s say the average sale price for homes in your neighborhood is $300,000. But your 40-year-old house is valued at $220,000 because the last renovation was in 1990.

Should you sell the house as-is and shop for a newer home for yourself, or should you renovate and stay in your current home? The following are conservative cost estimates:

You invest approximately $40,000 on renovations to your home, which quickly increases the value of your asset by at least $40,000.

If you could sell the house now for a going price of $300,000, you may have just earned another $40,000. The expense is converted to an asset that will continue to increase in value according to real estate market performance.

You will want to get exact cost numbers for your renovation projects from three separate renovation contractors.

Do Property Improvements Count As Asset or an Expense?

If you are making necessary renovations to existing improvements, they may count as an asset. But many property improvements are an expense that may bring homeowners great enjoyment but which will not increase and may even lower your property value.

One classic example is an in-ground swimming pool, of which the conservative cost is $35,000.

Homeowners tend to see in-ground pool installation as an asset because they enjoy swimming in a nice pool of their own at home, and a lovely pool area creates curb appeal.

Some pool owners firmly believe they should get that money back when they sell the house. They might get the money back, but they have narrowed their potential buyer pool.

An in-ground swimming pool is not considered an asset by some home buyers, especially those in Northern climates. If they buy your home, they may offer a lower price to compensate for the need to fill the pool in. To them, it’s a safety hazard or eyesore.

Install a swimming pool if you want one but consider it an expense unless you live in a scorching climate…and maybe not even then.

However, if an existing swimming pool is in poor condition, or there is a bathhouse with rotted timbers, and ragged landscaping, you could have those renovated to improve the property’s appearance and protect or even increase the value of your asset.

What About Additions and Extensions?

When you add an attached garage, porch, patio, extension, or other addition, you are improving an existing structure or adding usable square footage to that structure. That adds value to the house, which will endure with needed maintenance.

This kind of renovation can give your family needed space.

The only other way to gain those amenities and living space is to buy a bigger house with the additional amenities. Get renovation bids from local contractors to add the space you need, and compare the cost of renovation to buying up.

One possible benefit to renovating your existing home over buying new is financing the cost. Consider that selling your home can add expenses from your profits, such as:

  • Agent fees
  • Moving expenses
  • The down payment
  • Larger monthly mortgage payments
  • Larger debt load

Instead, you could utilize your home equity by refinancing or taking a small short-term second mortgage.

Maintenance Costs Are Expenses Required To Protect Your Asset

On average, the cost of a new roof is about $5500, which is a necessary maintenance expense. It’s how you protect your investment, so it doesn’t lose value.

Others on that list will include:

  • Wet basement remediation
  • Garage door repair and replacement
  • Driveway repair
  • Furnace and A/C repair or replacement
  • Porch repairs

The list is long and actual costs depend on many variables.

How To Turn Renovations Assets Into an Expense

If you are a carpenter, roofer, electrician, or interior decorator, by all means, do those renovations yourself, to save on renovation costs.

If the trades are not your real job, we recommend hiring professionals that come highly recommended by reputation. But don’t take anyone’s word for it without seeing representative examples of their skills.

A botched or poorly completed renovation is an expense, not an asset. You want experience, a written bid, license, and proof of liability insurance and workers compensation insurance. Before you put money down on the job, get a firm start date.

Renovations Are an Asset for Your Commercial Building

We have focused on private homes as an asset. Everything true about home investment and the benefits of renovations is true for commercial buildings. The building is an asset, and renovations to update the appearance and function of the building are an investment.

Commercial building renovations to keep the building safe, attractive, and compliant with local codes are money well spent and will increase the property value.

Depending on your situation, there is another benefit to moving forward with renovations.

For you, those renovation costs may well be a tax deduction against your business, just as maintenance and repairs are tax-deductible. If you own a rental house, renovation costs can be a tax deduction from your yearly rental income.

Conclusion

Skilled renovation professionals are a valuable asset to all home and commercial building owners. The cost for their services is an investment in short and long-term profits from domestic and commercial property.

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