Home equity is the market value of your financial interest minus the debt balance against it. Typically, the largest debt against your home is your mortgage. As you make mortgage payments against the loan, the equity of your home increases. You may also gain equity as your property appreciates in fair market value.1 Understanding your home equity as well as larger home equity trends is key for making a sound investment in property and then increasing your equity in that investment.
Once you’ve invested in property, you must decide which home improvements to make to boost the equity of your home. Before you consider large home renovations, start with the basics. When a potential buyer looks at a home, he assumes that the basic systems are running smoothly.2 No one wants to buy a home and then immediately sink thousands of dollars into a new roof, plumbing infrastructure, or HVAC system. Taking care of the basics will minimize monthly maintenance expenses and put your home in prime condition for potential buyers.
After the home is in good working order, think about tackling a larger renovation. Two of the best rooms to invest in are the kitchen and bathroom. In a strong housing market, a top notch kitchen or bathroom remodel frequently returns over 100% of the cost. People spend a lot of time in their kitchens and bathrooms and will be able to tell whether or not money was well invested in these areas of a home.
Do you live in an older home with only one bathroom? If space permits, it makes more sense to add a second bathroom than to renovate the only bathroom. If your home has two, three, or even four bedrooms and just one bathroom, adding a second bathroom may increase the sales price as much as 8.7%, which is more than double the rate for adding another bedroom.4
If you’re not anticipating a move in the foreseeable future, be honest with yourself about whether you’d get more use out of a bathroom or kitchen renovation. Even if you don’t get quite as much money back doing the remodel that you really want, you’ll get a lot more enjoyment out of the home.
As you weigh varying home improvement projects, think about the value of your house, the average home value in your neighborhood, the general state of the housing market in your area, when you plan to sell your home, and the projects that interest you the most.5 For example, an $8,000 stove is fabulous, but it simply doesn’t make sense to install it in a home worth $220,000. You want to choose home improvements that offer the biggest bang for your buck.