Cost vs Value for renovation or remodelling

[Wayne Igo]

We all know the typical investor model for flipping: buy at a discounted price, remodel/renovate and sell ASAP.  Thousands of investors are making money, good money, every day using this model.  Simple in concept, but harder, trickier and more involved than you might think to make it work.

Recently, I was reviewing data for the Renovation Cost vs Value question that every investor has to deal with on every project.  The most credible data came from Craig Webb and can be seen at www.remodeling.hw.net . The database is rather large and takes Geographic location, labor costs variations, material costs, contractor overhead, etc. The Cost is based on having a Pro perform the work (i.e. not DIY). As you can see from the data, for every dollar you spend on a rehab/renovation project you get anywhere from $.50 to $.90 back when you sell the home. Interesting! In other words you never get all your money back. For example, the bathroom remodel that cost you $76,429, will increase the market value of the house by only $32,385 ( or a -40.2% ROI). Based on the data, you never, never get all your investment back on the rehab cost. So, why would anyone spend money to update a property?

What does that mean for the investor?  I have my on take on what this data means and how it should be used.  But, I really would like to see another discussion on this topic because purchase price, renovation costs and market value are at the heart of the investor's profit model.

I look forward to your comments.

Wayne