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Home Improvements That Build Equity Over Time

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Due to the COVID-19 pandemic, many of us have spent much more time at home over the last two years than is typical. During this period, homeowners have poured time, energy and money in renovations, remodels, repairs and other home improvements. Despite delays due to lockdowns, material shortages, inflation and supply chain disruptions, home improvement spending has skyrocketed over the last couple of years. According to Angi’s annual State of Home Spending report, home improvement spending in 2021 “rose 25% year-over-year to $10,341.” The number of projects undertaken by homeowners across the US also increased. Angi’s State of Home Spending report found that those “who invested in home improvement did an average of 3.7 projects” last year. In 2020, the average number of projects started by homeowners that year was only 2.7. Maintenance spending fell while spending on emergency repairs and elective renovations like painting, bathroom remodels and smart home systems increased. Of course, not all home improvements add value. Some homeowners focus too much on fleeting trends while others fail to obtain necessary permits. In this post, we identify twenty home improvements that actually build equity over time. We also explain how homeowners can finance improvements and which qualify for tax deductions, credits and rebates. Follow below to learn all about the many improvements that appeal to potential buyers, boost home value and help homeowners build equity.

What is Equity?

Equity is the appraised value of your home after all outstanding home loans

Equity is the appraised value of your home after all outstanding home loans and other debts related to your property have been deducted. The Freddie Mac resource “Understanding your home’s equity” explains that equity grows over time as you invest more money in your home. When you buy your home, for example, your home equity is equal to your down payment. While equity is the difference between your home’s value and what you owe, keep in mind that your entire mortgage payment does not go towards building home equity. Interest payments, property tax payments and insurance payments do not increase the amount of equity you hold in your home.

Benefits of Building Equity in Your Home

From growing your net worth to cash-out refinancing, there are many benefits to building equity in your home. In her article “How to build equity in your home” for Bankrate, Kim Porter writes that “building equity in a property means…you can borrow equity for nearly any purpose.” You can leverage the equity you have in your home with a HELOC (home equity line of credit) or with a home equity loan. These loans can be used for a variety of different projects. Building equity also means you will make more of a profit when you eventually sell your home.

How Homeowners Build Equity Over Time

Homeowners build equity in one of three ways. Either they pay off debt related to the property, make improvements to the home or watch the home’s appraisal value increase as the market changes. In her article “How to Build and Use Equity in Your Home” for TIME partner NextAdvisor, Laura Leavitt elaborates. Leavitt writes that first-time buyers can start their homeownership journey with more equity by making larger down payments and choosing mortgages with lower interest rates. With a lower interest rate, a larger chunk of your mortgage payments goes towards paying down the loan’s principal and building equity.

Making biweekly mortgage payments and “refinanc[ing] to a mortgage with a shorter term” can also help homeowners build equity. As we will explain throughout the course of this post, investing in certain home improvements builds equity too. Some home improvements — called “capital improvements” — also reduce capital gains tax owed when you eventually sell your home.

Lastly, many homeowners build equity by waiting until their home has naturally accrued value due to market factors and changes to their neighborhood. As Leavitt writes in her NextAdvisor article, “home equity grows or shrinks in response to the wider housing market.” For example, many American homeowners experienced large jumps in equity over the last couple of years as home values shot up all over the country. Lack of available inventory, high demand and construction stalls contributed to this increase. Though Leavitt acknowledges that “big fluctuations do occur…the long-term trend is for prices on average to rise.”

How to Make Sure Home Improvements Add Value

As mentioned above, not all home improvements add value or save money. In the end, some home improvement projects have a very low average cost recouped or return on investment. Below, we list a few ways homeowners can make the most of their home improvement projects.

#1 Look at the local market.

#2 Track trends with staying power — like those towards sustainability and home health.

#3 Avoid home improvement projects like swimming pools and ponds that could be considered risky by prospective buyers.

#4 Always obtain necessary permits and schedule inspections as required by law.

#5 Do not make your home significantly larger or more luxurious than other homes in your neighborhood.

#6 Follow all HOA rules.

#7 Avoid home improvements that are kitschy or unpopular amongst potential buyers.

#8 Keep colors and materials neutral.

#9 Do not try to replicate fleeting style.

#10 Consult with a real estate agent or architectural conservator when updating or altering a historic property.

Home Improvement Projects That Build Equity

#1 Adding an ADU

First on our list of home improvement ideas is to build an  ADU

First on our list of home improvement ideas is to build an attached or detached ADU. According to a recent article published by the National Association of Realtors in Realtor Magazine, “ADUs can add 35% to home value.” Determining how much property value an ADU will add can be difficult for real estate agents, in part because few homes in residential areas of the US actually have ADUs. This lack of comparable properties can complicate appraisal and valuation.

A post from the nonprofit Bay Area news organization Berkeleyside notes that ADUs often boost home value significantly. Citing a report published in The Appraisal Journal, the Berkeleyside post notes that “ADUs contributed, on average, between 25% and 34% of each property’s assessed value.” That same study — which looked at homes in Portland — “found that adding an ADU to a single-unit property ‘could reasonably add 51% to longer-term measures of value or return.’” Unlike other major remodels and renovations, “building an ADU does not trigger a reassessment” in California due to Prop 13. This means that your property taxes will not increase dramatically after building an accessory dwelling unit.

Secondary Income from Renting Out Your ADU

While a significant financial investment, adding an ADU not only raises your property’s resale value by expanding its habitable square footage. As long as your city allows construction of ADUs, adding an ADU can also provide consistent rental income from long-term tenants or short-term rental income from users of sites like Airbnb and VRBO. According to Mia Taylor in an article for Better Homes & Gardens, “it’s possible to recoup your investment in an ADU in less than 10 years” by renting out the unit. For more information about the legality of using an ADU as a short-term rental, read this post from Torii.

#2 Building a High-Quality Deck

wooden decks typically have a return on investment of about 75%

According to Kate Dole in a recent article for Ownerly, wooden decks typically have a return on investment of about 75% — which is a high ROI when compared to other home improvement projects. Quoting contractor and remodeler Jon Jordan, Dole writes that “‘decks can add living space to outdoor areas, and they are a low-maintenance, cost-effective way to improve your yard aesthetic.'” The size, aesthetic, building materials and contractor you choose will all impact the return on your investment when it comes time to sell.

#3 Improving Your Home’s Exterior

renovations that build equity and have high ROI for homeowners

Increasing your home’s curb appeal is an easy way to boost your home’s value. From replacing siding and updating the entryway to painting the exterior and landscaping the front yard, fixing up the outside of your home can attract future buyers. Writing for The New York Times in his article “Want to Increase Your Home’s Value? Start With the Entrance,” Tim McKeough explains. Quoting architect Scott J. Sottile of Ferguson & Shamamian Architects, McKeough writes that a home’s entrance is “‘an outdoor room…[that] sets the stage for everything you’re going to experience in the house.'”

Seattle-based architect Prentis Hale agrees, noting that “‘curb appeal increases property values…in a very direct way.'” According to a Journal of Real Estate Finance and Economics study, just curb appeal by itself “could account for up to 7 percent of a home’s sale price.” To boost your home’s curb appeal, slap on a new coat of hard-wearing paint, update light fixtures and invest in attractive landscaping. Install a new garage door or power wash your home’s siding and driveway for even more curb appeal!

#4 Replacing Doors and Windows With Energy Efficient Versions

renovations that build equity and have high ROI for homeowners

Next, consider replacing your home’s existing doors and windows with energy efficient versions. Because they save money on utility bills while helping the environment, energy efficient windows and doors are a must-have for many future buyers. We explain further in our recent post “Green Updates That Could Increase Your Home’s Resale Value.”

Referencing data from MyHome by Freddie Mac, we note that 83% of prospective buyers want Energy Star certified windows. According to Lawrence Bonk in his article “15 Projects to Increase Your Home’s Value” for Angi, returns on this investment are significant. Bonk writes that homeowners who replace their windows with energy efficient versions will “get a 68% return on investment, improved energy efficiency, and some added visual pizzazz on both the interior and exterior.”

#5 Refinishing or Replacing Hardwood Floors

renovations that build equity and have high ROI for homeowners

Fourth on our list of worthwhile upgrades is to refinish hardwood floors or replace carpet with new hardwood. Compared to other improvements, hardwood floors offer an incredible return on investment (ROI) of between 70% and 80%.

Julie Ryan Evans explains in her article “Do Hardwood Floors Provide the Best Return on Investment?” for Realtor.com. According to Evans, “‘most buyers nowadays are expecting hardwood.'” In fact, when properly installed, “new wood floors can add up to 2.5% to the sale price” of a listed home.

#6 Landscaping the Backyard

renovations that build equity and have high ROI for homeowners

Next, your real estate agent might recommend you landscape your backyard and upgrade your home’s outdoor space. Whether you landscape with native plants or invest in hardscaping projects like a patio or retaining wall, sprucing up your backyard could encourage buyers to place offers on your home. According to Gina Vaynshteyn in an article for Apartment Therapy, “carefully-planned landscaping can add 10 to 15 percent to a home’s value in a hot market.”

#7 Finishing the Basement, Attic or Bonus Room

renovations that build equity and have high ROI for homeowners

An unfinished basement is not as appealing to buyers as a completed space. Finishing your basement, attic or bonus room could add value to your home in several ways. It could add another bedroom to your property, which typically boosts resale value. Upgrading your basement or attic could also provide rental income. According to Erin Eberlin in an article for The Balance Small Business, finishing your basement is also “a great way to add space if zoning codes don’t allow other additions” like an ADU.

As mentioned above, homeowners should consider their local market before making major renovations like finishing their basement, attic or bonus room. According to Zillow, “homeowners in the Pacific region, which includes California, Hawaii, Washington, Oregon and Alaska, are likely to see the biggest ROI on a basement remodel.” Homeowners in the Pacific Region of the US average an 86.4% ROI on a finished basement, while homeowners in the rest of the country average around 70% ROI.

#8 Fixing Plumbing and Electrical Issues

renovations that build equity and have high ROI for homeowners

Improving your home’s value begins with fixing major issues that went unaddressed by previous owners or which occurred while you owned the property. Some issues — particularly cosmetic defects — need not be repaired before listing a home for sale. Major issues — such as those with plumbing and electrical systems — should be fixed to ensure a quick sale at or above asking price. Any issues that affect the home’s habitability could cause it to fail a home inspection or appraise well under your asking price. Either could eliminate a prospective buyer’s ability to secure a mortgage on your home, causing the sale to fall through.

#9 Updating the Interior

renovations that build equity and have high ROI for homeowners

Another way to boost your home’s value is to make simple interior updates like sanding textured walls, replacing wallpaper and adding crown molding. Getting rid of outdated wallpaper will make your home feel brighter and more modern to discerning home buyers. According to John Miley in his article “8 Easy Projects That Add Value to Your Home” for Kiplinger, adding crown molding also attracts buyers.

Quoting Coldwell Banker real estate agent Fredda Weisbard, Miley notes that “crown molding in your home compared with none in a similar home in your neighborhood could make a difference when it’s time to sell.” Weisbard explains that crown molding is “‘a feature that most buyers appreciate when looking for a home.'” She notes that crown molding is “‘a wow-factor feature…it stays in buyers’ minds.'”

A fresh coat of paint goes a long way too. In our post “Green Updates That Could Increase Your Home’s Resale Value,” we explain. Quoting Unsustainable Magazine writer Geraldine Mills we note that “’repainting and adding a fresh coat on your walls is a simple way to maximize your property’s resale value.’”

#10 Build a New Garage

renovations that build equity and have high ROI for homeowners

Tenth on our list of worthwhile home improvement projects is to build a new garage — either attached to your house or as an entirely separate building. While expensive — the average spend is just under $30k — adding a garage can boost your home’s resale value while providing you and your family with significant utility. As long as building a new garage is legal in your area, it could increase the equity you have in your home. In her article “What to consider before building a garage addition: Experts weigh in” for Real Homes, Terri Williams explains. Quoting Angi expert Bailey Carson, Williams writes that “‘a garage has great ROI, so you’re likely to earn back 60-80 percent when it comes time to sell your home.'”

10 Additional Home Improvements That Boost Resale Value

#11 Embracing Smart Home Technology

#12 Bringing Unpermitted Work Up to Code

#14 Adding a Second Primary Suite

#15 Replacing High-Maintenance Features

#16 Adding Built-Ins Like a Pantry and Bookcases

#17 Updating Outdated Lighting and Hardware

#18 Creating a Dedicated Laundry Room

#19 Adding a Kitchen Island — or Two!

#20 Insulating Your Attic and Garage

#22 Installing Solar Panels

How to Finance Home Improvements

Here’s how you could finance home improvement projects by borrowing money:

#1 Home Equity Loan

#2 Home Equity Line of Credit

#3 FHA 203(k) Rehab Loan, Title I Property Improvement Loan or Other Government Loan

#4 Cash Out Refinancing

#5 Personal Loan

Home Improvement Projects That Qualify for Tax Deductions, Credits and Rebates

The following home improvements qualify for a variety of tax deductions, credits, rebates and other state, local and federal incentive programs. Consult your tax advisor for more information.

#1 Capital Improvements

#2 Energy-Efficient Home Improvements

#3 Medically Necessary Home Improvements