Return on investment (ROI) is not always the first thought of a renovating homeowner, but is usually something that is considered for any home renovation. Many renovators, when calculating ROI, fail to recognize some of the disguised costs that come with a gain in a home’s value.
Property tax, an underlying cost that adds to the price tag of a project, is often unaccounted for by amateur renovators. A report released by the National Association of Realtors stated that both additions to and finishing spaces that already exist in a homeowner’s property, such as unfinished garages, basements, and attics, will be assessed by your county/city and increase the home’s value and, in a turn, increase the property tax.
Making a smaller-scale change to the internal structure of your home can trigger a reassessment as well. This is when a homeowner might need to consult an expert for help. The line becomes blurred on changes that might affect a reassessment of value. Some seemingly small projects can be determined to increase a property’s value enough for a hike in property taxes. On the other hand, an expensive project such as repairing a foundation or installing new flooring may not trigger a reassessment of your property by the county’s assessor office.
Realtors consistently work in assessing equity, and understand the ins and outs of significant changes in value. A project as small as adding an island can affect what is called the home’s “live-in value.” This could trigger an assessment by the city, but a quick chat with a Realtor can help you make decisions before it happens. Furthermore, a trained Realtor can run you through the number changes you can expect with relative ease.
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Do assessments and potentially increased taxes have you stressed? Not to worry, things aren’t as bleak as they seem. It is the general consensus of the home renovation community that if you are renovating a house you plan on inhabiting, and not taking part in the boom or bust project of “flipping” a house, then you’re in the clear. The long-term increase in value of the renovation should be worth the upgrades when compared to the costs, taxes included. The benefit of livability alone may be worth the move on an individual basis. Factoring that information with the recent recovery of the housing market, the positives definitely outweigh the negatives.
There are other factors that can drive your ROI into the red – or black, for that matter – that should be considered in your long-term plan. As of Friday, December 16, the Federal Reserve reported that it was raising interest rates 25 basis points (0.25 percent) for the first time since 2008, by unanimous vote. A favored option for financing renovations are home equity loans, and the interest paid can usually be compensated by an increase in ROI. While it has been shown that raises in the federal reserve rate generally do not affect mortgage rates, it is nonetheless something that homeowners should watch moving into the future with regard to short-term loans on your home’s equity.
To wrap up, there has never been a better time to take on a home renovation project over the past 6 or 7 years. The rise in interest rates courtesy of the Federal Reserve marks a long-awaited recovery from the double-dip recession that followed the burst of the housing bubble late into the 2000s. Values in the housing market should follow an upward trend, so getting started on a project you’ve been hesitant about may be a great option. Just make sure to check with a Realtor if you are unsure about how unexpected costs can affect your project.