Are Renovations an Asset or an Expense?

Giovanni Valle is a licensed architect and LEED-accredited professional and is certified by the National Council of Architectural Registration Boards (NCARB). He is the author and managing editor of various digital publications, including BuilderSpace, Your Own Architect, and Interiors Place.

Renovating the old bathroom or kitchen is expensive 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? You can answer that question 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. According to real estate market performance, the expense is converted to an asset that will continue to increase in value.

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

Do Property Improvements Count As Assets or an Expense?

They may count as an asset if you are making necessary renovations to existing improvements. 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 have narrowed their potential buyer pool.

Some home buyers do not consider An in-ground swimming pool an asset, 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 timber 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 needed space and compare the renovation cost 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, I recommend hiring reputable professionals that are highly recommended by others. 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, a license, proof of liability insurance, and worker’s compensation insurance. Before you put money down on the job, get a firm start date.

Conclusion

Renovations are an upfront expense. Whether or not they prove to be an asset depends on the type of renovation and whether the renovation is done for pure enjoyment as an owner or as an investment in your property to increase resale value.

Skilled renovation professionals are valuable 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.