Kitchen remodel.
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Consider this dilemma: someone has an old home in a high-price area and is considering adding a bathroom to the home. However, she does not have very much in the way of savings or investments and is worried that using some of her investments on upgrading her home may be a mistake. If you’re facing a similar decision, here is how you can weigh the decision of whether to upgrade your home or invest your money in financial markets.
Home Improvements
There are several positive reasons to consider improving your home, including:
Increased Property Value
Certain home renovations, like the addition of a bathroom or updating the kitchen, can increase the home’s value. The increased value of the upgrade generally depends on the scope of the project.
According to Ramsey Solutions, the national average return on investment (ROI) on a major upscale kitchen remodel is just shy of 54%. If you’re spending $100,000, your home value could increase by $54,000. However, that percentage increase can be more significant in a minor remodel. The national average ROI on a minor remodel is 81%. So, a $20,000 project might increase property values by $16,200.
According to Realtor.com, adding a midrange or upscale bathroom has a similar ROI to the upscale kitchen remodel at 54-55%. Someone spending $40,000 on this might expect an increase in home value around $21,600. Real estate experts also say an additional bathroom could bring more buyers if you end up selling your home.
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Increased Personal Enjoyment
Increased personal enjoyment is a critical factor to consider, and one personal to you. After a kitchen remodel, many families reported increased family time, healthier lifestyles, and increased cooking at home. The woman considering the bathroom addition in the earlier example could have increased privacy and decreased exposure to potential germs from her tenants she rents the extra rooms out to.
Tax Benefits
There can be tax benefits for making home improvements. If you make energy-efficient upgrades, you may be entitled to deductions or tax credits. While you won’t be able to entirely deduct the cost of an upgrade the year it happens, if you keep track of the cost of your improvements, they can serve to save you tax dollars when you sell your home down the road.
Let’s say you are unmarried and bought your home for $250,000, spent $100,000 on upgrades over more than five years, and your home is now worth $600,000 when you sell. The cost basis of your home becomes what you paid for it plus the money you spent on upgrades, which totals $350,000. If you sold your home then, you would pay no capital gains tax with the $250,000 capital gains exclusion.
Market Investments
Market investments, while they do not provide the same personal enjoyment benefits, have a few marked financial benefits:
Higher Return Potential
When reviewing the ROI of home improvement figures, we found that most people are not breaking even on the financial cost of their home improvements. All that aside, financial markets consistently yield a much higher return than even appreciation of the total value of homes nationwide.
Based on the Case-Schiller U.S. National Home Price Index, from January 2000 to October 2024, the annualized increase in national home values was about 5%. Over that same period, the S&P 500 had total returns of about 8%. The last 24 years have also been historically anomalous for home prices; values in the prior 100 years basically tracked inflation. Historically, the S&P 500’s total returns are closer to 10%. You can also do even better than the S&P 500 by incorporating other indexes into the figures.
You also have the opportunity to get tax-free gains in tax-advantaged portfolios like Roth IRAs.
Liquidity And Flexibility
A portfolio of investments in public securities offers daily liquidity and flexibility to change your investment allocation. You cannot sell an individual bedroom or other piece of your home whereas you can sell fractional portions of your investment portfolio. You also are unlikely to be able to sell your entire home immediately if you need cash today.
Diversification
A home is a singular asset that can be subjected to individual risks. Your property value can be negatively impacted by external factors that you have no control over, such as increased fire risk, flood risk, the introduction of a pollution source, or a major business moving away. If you wanted diversification benefits, it would take a major capital expenditure to own homes and commercial properties in a variety of cities.
With an investment portfolio, you have the option of exposure to thousands of different companies at a very low cost. Diversification reduces the risk of any one company negatively impacting your portfolio and increases your risk-adjusted expected returns.
Conclusion
When deciding whether to upgrade your home or invest elsewhere, consider both financial and personal factors. Home improvements can enhance property value and personal enjoyment, but they may not always yield high financial returns. Market investments, on the other hand, offer higher potential returns, liquidity, and diversification. Weigh the benefits of potential home value increase and personal satisfaction against the financial advantages and flexibility of market investments to make an informed decision.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE- 7520774.1 (1/25)(exp. 1/29)