Everything You Need to Know About ROI

What is Return on Investment? (ROI)Dreaming of an updated kitchen? How about a larger bathroom or a swimming pool out back? Many Eden Prairie homeowners justify home improvement projects by saying they will make the cost back when they sell. However, the truth is that not all home improvements are worth the same. It's important to consider the return on investment (ROI) when deciding where to spend.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What Is ROI?

ROI stands for "return on investment." In the most basic terms, it relates how much an investment costs against the amount that investment earns back. No one has unlimited funds; therefore, ROI is a good way to calculate which real estate investments provide homeowners with the most bang for their bucks.

How Is ROI Calculated?

ROI is most often expressed as a percentage or a ratio. Someone who is comparing the ROI of two different home improvement projects can arrive at an estimated figure by doing a bit of quick arithmetic.

The return on investment is equal to the current value of an investment minus the cost of investment, then divided by cost on investment to get a percentage.

Say someone updated their bathroom at a cost of $10,000. This included a new tub, sink, toilet, flooring and tile, along with new fixtures. On average, a home seller's profit increases by $10,700 if the home has an updated bath. To calculate the return on the investment, they would subtract $10,000 from $10,700, to arrive at a return of $700. Divide that by $10,000 to get a 7% return.

It is worth noting, however, that most home improvements will have a negative return on investment. This is to say that a homeowner will recoup less at sale than they spent on the improvement. Because of this, homeowners should put more emphasis on what projects will improve the house for them and less on what they'll earn at sale.

Which Home Improvements Offer the Best ROI?

As noted earlier, when it comes to return on home improvement investment, not all improvements are created equal. Some improvements lead to higher selling prices and quicker sales. Some improvements will not dramatically increase a home's selling price at all. By choosing carefully, homeowners can put their money into the investments that are most likely to bring in the best returns.

Everyone's results are likely to be dependent on a host of other factors that range from the state of the local real estate market to the condition and features of the home itself. However, on average, these are the home improvements that typically bring the best ROI:

  • A remodeled kitchen. Experts say that the right improvements can bring an ROI that can go as high as 20%.
  • A bathroom addition. Homes with only one bathroom are at a disadvantage in the real estate market. Putting in an additional bath can result in a return of up to 30%.
  • Energy-efficient windows. This is an update that allows homeowners to recoup 90% of their investment at sale. As a bonus, homeowners can often collect a tax credit at installation and enjoy lower energy bills all year long.
  • A fresh coat of paint. This is a project that costs very little, but can dramatically improve the curb appeal of a home. Other basic maintenance like replacing rotting wood and keeping the landscaping in top shape are winners, as well.

In the end, it's a good idea to invest in what will make a home more valuable to the people who are living there now. When choosing where to spend money, choosing this type of way ensures the best return, even when it's not possible to get the best ROI.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

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