How to consider home improvement expenses

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Njm8845
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How to consider home improvement expenses

Post by Njm8845 » Tue May 12, 2020 8:43 am

We are doing some improvements to our home. Purely in regards to my expense tracking, I am wondering how much should be considered “expenses” versus how much should be considered an investment that increases house value.

I guess the easy way would be to assume that every dollar spent on home improvements increases the value of the house as well, but this doesn’t seem right.

I realize this is a pedantic academic question, but was wondering what other bogleheads do.

runner3081
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Re: How to consider home improvement expenses

Post by runner3081 » Tue May 12, 2020 9:02 am

For us, all expenses. We have our house to live in and any improvements are for us, not to increase value.

bayview
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Re: How to consider home improvement expenses

Post by bayview » Tue May 12, 2020 9:02 am

Njm8845 wrote:
Tue May 12, 2020 8:43 am
We are doing some improvements to our home. Purely in regards to my expense tracking, I am wondering how much should be considered “expenses” versus how much should be considered an investment that increases house value.

I guess the easy way would be to assume that every dollar spent on home improvements increases the value of the house as well, but this doesn’t seem right.

I realize this is a pedantic academic question, but was wondering what other bogleheads do.
This recent thread might be a useful read:

viewtopic.php?f=2&t=314426&p=5241197#p5240731
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

TN_Boy
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Re: How to consider home improvement expenses

Post by TN_Boy » Tue May 12, 2020 9:54 am

Njm8845 wrote:
Tue May 12, 2020 8:43 am
We are doing some improvements to our home. Purely in regards to my expense tracking, I am wondering how much should be considered “expenses” versus how much should be considered an investment that increases house value.

I guess the easy way would be to assume that every dollar spent on home improvements increases the value of the house as well, but this doesn’t seem right.

I realize this is a pedantic academic question, but was wondering what other bogleheads do.
It always looks like an expense to me ....

You can google around and come up with estimates of what percent of an improvement you are likely to get back at resale time. True bathroom and kitchen upgrades are worth something (not the full cost of the improvement). Even there, I suspect often the benefit is a quicker sale versus a true meaningful increase in the sales cost.

Some "improvements" might be worthless to the next buyer.

bloom2708
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Re: How to consider home improvement expenses

Post by bloom2708 » Tue May 12, 2020 10:02 am

Difficult to answer. I would say 5-20% of a project could add to your house value.

Projects can easily decrease the home value. Say you love color and paint every room a bright/floral/happy color. That might be -5%. The next owner might have to repaint every room. Or you put new carpet throughout the house. The next owner may want hardwood.

Put in a pool/hot tub that you love, the next owner may not want that. It could reduce the value of your home.

Are you improving to sell or improving to live (for 5-7 years+)?

Improving to sell, be wary. Improving to stay a long time? Well, then count it as an expense and know that each year you get 2% added to your home value (maybe).
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

Dottie57
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Re: How to consider home improvement expenses

Post by Dottie57 » Tue May 12, 2020 10:12 am

The makeover of my kitchen was an investment in my life. The kitchen became more functional and beautiful. I have enjoyed it for 12 years. It will make my home easier to sell and I may get more $ when sold.

dsmil
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Re: How to consider home improvement expenses

Post by dsmil » Tue May 12, 2020 10:17 am

I still count major improvements as expenses, but I track them separately from my monthly budget. It get tracked along with bonuses, vacations, other major misc. items. I do update my net worth spreadsheet for the estimated increase in house value, so on a net worth basis, it offsets some of the costs.

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Blueskies123
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Re: How to consider home improvement expenses

Post by Blueskies123 » Tue May 12, 2020 10:20 am

I consider them expenses as far as my budget goes but make sure to keep your receipts, you might be able to add those costs to the basis of your house if and when you ever sell the house. There are lots of exceptions and rules so do a bit of research.
If you find yourself in a hole, stop digging

decapod10
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Re: How to consider home improvement expenses

Post by decapod10 » Tue May 12, 2020 10:21 am

We added a room to our house, and considered it all expense really. If I'm comparing a $500k house and a $600k house, I don't consider paying an extra $100k for a house an investment, though others may see it differently.

oldfort
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Re: How to consider home improvement expenses

Post by oldfort » Tue May 12, 2020 10:27 am

Unless you’re adding square feet, almost all expenses. Kitchen remodels change fashion like women’s clothing. Whatever you do today will look dated in 10 years.
Last edited by oldfort on Tue May 12, 2020 10:27 am, edited 1 time in total.

coachd50
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Re: How to consider home improvement expenses

Post by coachd50 » Tue May 12, 2020 10:27 am

Njm8845 wrote:
Tue May 12, 2020 8:43 am
We are doing some improvements to our home. Purely in regards to my expense tracking, I am wondering how much should be considered “expenses” versus how much should be considered an investment that increases house value.

I guess the easy way would be to assume that every dollar spent on home improvements increases the value of the house as well, but this doesn’t seem right.

I realize this is a pedantic academic question, but was wondering what other bogleheads do.
What are you trying to accomplish? What information are you trying to get?

There was a somewhat similar thread revolving around the concept of GAAP (generally excepted accounting principles) and personal finance. I think this becomes somewhat a fool’s errand because GAAP is used to fairly present a business and its attempts to generate profit and continue to be a going concern. Humans are a bit different than businesses in that regard.

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TomatoTomahto
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Re: How to consider home improvement expenses

Post by TomatoTomahto » Tue May 12, 2020 10:34 am

Dottie57 wrote:
Tue May 12, 2020 10:12 am
The makeover of my kitchen was an investment in my life. The kitchen became more functional and beautiful. I have enjoyed it for 12 years. It will make my home easier to sell and I may get more $ when sold.
I think of most remodels like I think of adding options when buying a car. I buy them because I like heated steering wheels, or safety features, or silver color, but I don’t expect it to get me more $ when I sell. If it makes it easier to sell, awesome, but I got my money’s worth in the enjoyment.

ETA: we are finishing up a remodel/renovationthat was approx 50% the purchase price of our home. Some of it was absolutely necessary, but a lot of it was because we wanted it. Round numbers, in figure it adds 70% of money spent to the value.
Last edited by TomatoTomahto on Tue May 12, 2020 10:36 am, edited 1 time in total.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Watty
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Re: How to consider home improvement expenses

Post by Watty » Tue May 12, 2020 10:35 am

Unless it adds square footage remodeling likely does not add much if any value to your home.

If you have a old appraisal from when you bought the house take a look at it to see the details of when it makes adjustments to the value for something like an upgraded bathroom or kitchen. That is very rare.

Even if you see some chart like 50% of the cost of remodeling a kitchen will add to the value of a house that is misleading since if you remodel the house now but don't sell the house for 15 years then the remodeled kitchen will be 15 years old then and not be a prime selling point.

Trying to track value added to your house would be tricky since you would also need to depreciate it as it gets older. For example I doubt that you also do things like depreciate 1/25 of the cost of your roof each year.

I don't track my expenses but if I did I would just consider the remodeling(not repairs) to be sort of like money spent on a vacation.

HomeStretch
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Re: How to consider home improvement expenses

Post by HomeStretch » Tue May 12, 2020 10:43 am

I consider all home improvement as an expense in my tracking of expenses and cash flow.

I keep a running tally with backup of those home improvement expenses that increase my house basis to help reduce the amount of gain we will recognize when we sell (which currently exceeds the gain exclusion amount).

Market valuation of my home will be determined when I sell. For now I leave a conservative market value on my personal balance sheet that I adjust rarely. Our area has not recovered to 2007 home values level.

allones
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Re: How to consider home improvement expenses

Post by allones » Tue May 12, 2020 11:09 am

It depends on what your improving, the extent of the improvements, the local market, etc.

I'll contradict most of what folks are saying. I bought a house last year that needed major renovations. I put $125k + into new wiring, plumbing, HVAC, water heater, and remodeling rooms with custom materials, but as stylistically neutral as possible.

I put just 10% down for the purchase to make sure I had extra room for unexpected costs, and there were plenty. It was my plan from the start to refinance after the remodel on the assumption that improvements would increase value so I could eliminate PMI.

I had my fingers crossed to get a dollar-for-dollar increase in equity. To my absolute shock, the refinance appraisal came back $300k above the purchase appraisal, so I came out way ahead (on paper).

veindoc
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Re: How to consider home improvement expenses

Post by veindoc » Tue May 12, 2020 11:10 am

HomeStretch wrote:
Tue May 12, 2020 10:43 am
I consider all home improvement as an expense in my tracking of expenses and cash flow.

I keep a running tally with backup of those home improvement expenses that increase my house basis to help reduce the amount of gain we will recognize when we sell (which currently exceeds the gain exclusion amount).

Market valuation of my home will be determined when I sell. For now I leave a conservative market value on my personal balance sheet that I adjust rarely. Our area has not recovered to 2007 home values level.
What improvements would those be? That would increase your house basis? And how do you determine that? Are there IRS guidelines?

We swapped carpet for hardwood floor, updated a master bath by expanding shower (but did not increase square footage), and added a patio to name a few. We are not planning to sell until the first grader is off to college at the earliest and may wait until after he actually graduates. By that time the finishes we’ve chosen will be dated and many buyers may not consider them “improvements.”

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Njm8845
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Re: How to consider home improvement expenses

Post by Njm8845 » Tue May 12, 2020 11:34 am

Thanks for all the replies. I’m leaning towards just considering it all expense.

FYI, the renovations we’re doing are adding crown moulding and board and batten to the kitchen and living rooms. Also adding subway tile backsplash to kitchen.

HomeStretch
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Re: How to consider home improvement expenses

Post by HomeStretch » Tue May 12, 2020 11:46 am

veindoc wrote:
Tue May 12, 2020 11:10 am
HomeStretch wrote:
Tue May 12, 2020 10:43 am
I consider all home improvement as an expense in my tracking of expenses and cash flow.

I keep a running tally with backup of those home improvement expenses that increase my house basis to help reduce the amount of gain we will recognize when we sell (which currently exceeds the gain exclusion amount).

Market valuation of my home will be determined when I sell. For now I leave a conservative market value on my personal balance sheet that I adjust rarely. Our area has not recovered to 2007 home values level.
What improvements would those be? That would increase your house basis? And how do you determine that? Are there IRS guidelines?

We swapped carpet for hardwood floor, updated a master bath by expanding shower (but did not increase square footage), and added a patio to name a few. We are not planning to sell until the first grader is off to college at the earliest and may wait until after he actually graduates. By that time the finishes we’ve chosen will be dated and many buyers may not consider them “improvements.”
I suggest you start with IRS Publication 523 “Selling Your Home” pages 8-9:
https://www.irs.gov/pub/irs-pdf/p523.pdf

barnaclebob
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Re: How to consider home improvement expenses

Post by barnaclebob » Tue May 12, 2020 11:50 am

Njm8845 wrote:
Tue May 12, 2020 11:34 am
Thanks for all the replies. I’m leaning towards just considering it all expense.

FYI, the renovations we’re doing are adding crown moulding and board and batten to the kitchen and living rooms. Also adding subway tile backsplash to kitchen.
Yeah those aren't worth factoring into your homes value by a long shot. I loosely keep track of my homes value by doing a check against sold comparables every now and then.

jharkin
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Re: How to consider home improvement expenses

Post by jharkin » Tue May 12, 2020 12:16 pm

Most of the spending on the house is really an expense. Repainting, replacing the roof, updating worn out hardware or replacing end-of-life appliances... none of these have any meaningful impact on the value. At most, not doing them may lower the value somewhat as the appraiser would mark the condition as "poor" rather than "average" on the appraisal result.

Major renovations like gut remodeling the kitchen? - well there are lots of articles online that discuss the possible value add... but its usually something like 50 cents on the dollar.

Dottie57
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Re: How to consider home improvement expenses

Post by Dottie57 » Tue May 12, 2020 1:18 pm

TomatoTomahto wrote:
Tue May 12, 2020 10:34 am
Dottie57 wrote:
Tue May 12, 2020 10:12 am
The makeover of my kitchen was an investment in my life. The kitchen became more functional and beautiful. I have enjoyed it for 12 years. It will make my home easier to sell and I may get more $ when sold.
I think of most remodels like I think of adding options when buying a car. I buy them because I like heated steering wheels, or safety features, or silver color, but I don’t expect it to get me more $ when I sell. If it makes it easier to sell, awesome, but I got my money’s worth in the enjoyment.

ETA: we are finishing up a remodel/renovationthat was approx 50% the purchase price of our home. Some of it was absolutely necessary, but a lot of it was because we wanted it. Round numbers, in figure it adds 70% of money spent to the value.
I am not counting on more money. But I really do think it will sell easier.

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avenger
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Re: How to consider home improvement expenses

Post by avenger » Wed May 13, 2020 4:46 am

I consider any home improvement to be an expense. Taken further, home ownership in general is an expense.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

Mr. Rumples
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Re: How to consider home improvement expenses

Post by Mr. Rumples » Wed May 13, 2020 5:42 am

I am not sure how one separates expenses from an increase in value other than making sure the house doesn't become dilapidated. My neighbor is a real estate appraiser. When I asked him how much my new driveway would increase my home's value, he said $0. Only additions and a few other things affect value, though it might help sell the property. The county changes assessments based on a few things including additions. The new driveway or even adding a deck won't increase the assessed value as far as the county is concerned, but it might let me get by with asking more when it comes time to sell and it certainly looks better.

For myself, I look at it this way: there are maintenance expenses, improvement expenses and then there are expenses which add to the assessment. Each has their own payback and that payback depends on when the property is sold. That sounds obscure so perhaps someone can make it clearer.

TN_Boy
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Re: How to consider home improvement expenses

Post by TN_Boy » Wed May 13, 2020 9:19 am

barnaclebob wrote:
Tue May 12, 2020 11:50 am
Njm8845 wrote:
Tue May 12, 2020 11:34 am
Thanks for all the replies. I’m leaning towards just considering it all expense.

FYI, the renovations we’re doing are adding crown moulding and board and batten to the kitchen and living rooms. Also adding subway tile backsplash to kitchen.
Yeah those aren't worth factoring into your homes value by a long shot. I loosely keep track of my homes value by doing a check against sold comparables every now and then.
I agree with barnaclebob. No way you should consider this as having a meaningful impact on the value of the house.

Miguelito
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Re: How to consider home improvement expenses

Post by Miguelito » Wed May 13, 2020 9:43 am

TN_Boy wrote:
Wed May 13, 2020 9:19 am
barnaclebob wrote:
Tue May 12, 2020 11:50 am
Njm8845 wrote:
Tue May 12, 2020 11:34 am
Thanks for all the replies. I’m leaning towards just considering it all expense.

FYI, the renovations we’re doing are adding crown moulding and board and batten to the kitchen and living rooms. Also adding subway tile backsplash to kitchen.
Yeah those aren't worth factoring into your homes value by a long shot. I loosely keep track of my homes value by doing a check against sold comparables every now and then.
I agree with barnaclebob. No way you should consider this as having a meaningful impact on the value of the house.
Agree as well.

Some big investments that may get you very little for what you put in are pools, courts, and things of that sort. I put in a big detached garage. I finished it nicely inside too. If a "car guy" were interested in my house I would get a lot if not everything back for it. But for most people it's just an additional garage. It will surely be but who knows what dollar value they assign to it. Also, those investments have to be in the right proportion to the value of the home. You decide to invest $100k on a beautiful pool on a $200k house, you may get nothing for it. You do that on a $1.8M house in the suburbs and you might get a decent amount. But circumstances vary a lot. In the end, it's only worth what the buyer will pay.

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Quirkz
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Re: How to consider home improvement expenses

Post by Quirkz » Wed May 13, 2020 9:49 am

allones wrote:
Tue May 12, 2020 11:09 am
I'll contradict most of what folks are saying. I bought a house last year that needed major renovations. I put $125k + into new wiring, plumbing, HVAC, water heater, and remodeling rooms with custom materials, but as stylistically neutral as possible.

I put just 10% down for the purchase to make sure I had extra room for unexpected costs, and there were plenty. It was my plan from the start to refinance after the remodel on the assumption that improvements would increase value so I could eliminate PMI.

I had my fingers crossed to get a dollar-for-dollar increase in equity. To my absolute shock, the refinance appraisal came back $300k above the purchase appraisal, so I came out way ahead (on paper).
I think this is an exception. If you're doing enough work on a place that you'd have an appraisal done afterward, there's probably value being added beyond the expense. Conveniently, the appraisal is also the thing that tells you what that value is. In almost all other circumstances, if you're just guessing, there's probably not significant enough value.

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