Home Renovation Return on Investment: 3 Returns Nobody Tells You

William Reid (: 00:00

All right, everybody wants to know the home renovation return on the investment before they build. And almost nobody knows what to do with the answer. I'm Bill Reid, your home building coach. Over 35 years of residential construction, I've watched homeowners use that number to talk themselves into projects, out of projects, and into a whole lot of regret either way. So today I'll give you a way to think about it that puts you in the driver's seat instead. And I built a worksheet for this episode, and it's waiting for you in the show notes. Let's dig in.

William Reid (: 00:34

All right, welcome back, everybody. And I want to start with a sentence that you've probably heard and probably even said. Well, it's an investment. And somebody's talking about their kitchen or the addition or the new primary suite they've been sketching on napkins for two years. And somewhere in that conversation, usually right when the number starts to feel uncomfortable, out it comes. It's an investment. We'll get it back when we sell.

Everybody nods and nobody asks the follow-up question. So let me ask it. Get back what? All of it? Half? Over what period? Compared to what? I've had that conversation more times than I can count. And I can count on one hand the number of homeowners who actually could answer it. Not because they're careless, because nobody ever handed them a way to think about it.

Now I want to be very clear about where I'm going because this topic gets handled badly in both directions. There's one camp that treats return on investment like a rule. Don't do that. You won't get your money back. As if the only legitimate reason to improve your home is resale. And then there's another camp that waves it off entirely. Just build what you love, don't think about the money.

And both of those are a little lazy, and neither one is gonna help you. So here's what I actually believe watching this play out in real houses with real families. Return on investment is not a verdict, it's a piece of data. And there's a version of this decision that nobody warns you about. So let me say it plainly right now, because some of you need to hear it before we go any further.

If your project is gonna cost more than it adds to the value of your home, that is not automatically a bad decision. Sometimes that's exactly the right call. Sometimes you know what it costs, you know what comes back, and you do it anyway with your eyes wide open. That's not a mistake. That's a choice. So the mistake is making that choice without knowing. Overinvesting isn't the failure. Overinvesting by accident is.

So today, I'm not going to tell you which projects are worth it. I'm not going to hand you a ranked list of what pays and what doesn't, because that list changes by market, by street, and by year. And it was never the real question anyway. What I'm going to give you is a way to think three kinds of return, how to rank them for your own life, how that ranking should drive your design decisions instead of trailing behind them, and everything you need on that table before you commit to a project. And near the end, I'll show you what we're building to do this work for you because this is exactly the problem that we've been solving.

William Reid (: 03:18

Okay, so let's start with the reframe that makes everything else in this episode work. When homeowners say return, they mean one thing: money back at resale. That's not one return. That's one of three. And I'd argue it's not even the one that matters most to the majority of people that I've worked with. So here are the three.

The first is the financial return, what the market gives you back when you sell. So this is the one everybody means. It's the one every article measures, and it's the only one that shows up on a spreadsheet. It's also the one that you have the least control over, and we'll get to that in a few minutes.

The second is livability return. What you get out of actually living in the house, years of it, mornings in the kitchen that work, a house that fits your family instead of fighting it, space you stopped apologizing for when people came over. That's a real return. It's just not denominated in dollars. So people leave it out of the conversation and then feel a little guilty for wanting it. And I want to push back on that guilt because it does damage.

Nobody feels sheepish about a vacation. You spend real money, you come home with photographs and a feeling. And the return was the experience. A house you love works the same way, except you live in this one every day for years, which arguably makes it the better purchase.

The third is functional return. What problem the project solves? The roof at the end of its life, the systems that are gonna fail on somebody's watch, and it might as well be yours. The parent moving in, the stairs that stopped working for somebody in the house. This one isn't about wanting. It's about needing. And it plays by completely different rules because the alternative isn't don't build it. The alternative is deal with it later for more money on a worse day.

Functional work also does something sneaky that people miss. It doesn't feel like it adds value because when you're done, nothing looks different. But a buyer walking through a house with failing systems is subtracting in their head. Sometimes subtracting a lot more than repair would have cost because uncertainty is expensive. So functional work often protects value rather than adding it. That's still a return. It just shows up as a discount you never had to take.

So three returns: the financial, the livability, and the functional. Almost every homeowner I meet has them mashed into one word. And that single word is doing far too much work. Here's why that matters so much more than it sounds. You cannot rank what you haven't separated. So if all three of those are sitting in your head as one undifferentiated feeling called worth it, then you have no way to make a trade. And a construction project is nothing but trades.

Every single decision from the schematic design, the early stages of design through the last punch list item is a trade. So when the number comes back high and something has to give, what happens? People cut whatever is easiest to point at, whatever the last person mentioned, whatever hurts least in that particular meeting. They don't cut according to priority because they never built one.

So let me show you what it looks like when somebody has done that. So here's my famous couple, the McMillans again. The McMillans, before they ever interviewed an architect, knew that this was primarily a livability project. They were staying long time. The kids weren't gone yet. And when they were, the house was gonna be where everybody came back to. Financial return mattered to them, but it was third on the list.

They said that out loud to me, to their architect, to each other. So when the estimate came back over and something had to give, that conversation took 20 minutes, not three weeks, because they already knew which things were load bearing to them and which things were decoration.

So compare that to good old Ben and Jane, who I've talked about before. Their project was a livability project too. They just kept telling themselves and everybody else that it was an investment. And that story cost because every time they had a decision to make, they justified it with resale. This will help resale. Buyers will love this. And they kept spending toward a return that was never actually the reason they were doing it.

They ended up with a house they loved, a number they didn't, and a nagging feeling they'd done something wrong. They hadn't done anything wrong. They just never named what they were buying. So let's talk about the financial return specifically, because before you can rank it, you have to understand what actually governs it. And it isn't what most people think.

William Reid (: 08:27

So most homeowners assume value gets added the way a receipt adds up. You spend the money, the money goes into the house, the house is worth that much more. And that's not how it works. Here's how it actually works. When it comes to establishing what your home is worth, an appraiser looks at recent sales of similar homes near you. Comparable sales, comps. They adjust for differences and they arrive at a number.

Notice what is not in the process. Your receipts, your contract, your invoices, the 11 weekends you spent choosing tile. An appraiser is not adding up what you spent. They are measuring what the market pays for what you now have. And those numbers can be very, very far apart. And that's the whole reason the national data on this is what it is.

So I'm not gonna walk you through a list of projects today. Because that list moves around and it's the wrong thing to build a decision on. But you should know the general shape of it. So here it is. Across large remodeling projects, most homeowners get back meaningfully less than they put in. Not none of it, but not all of it, and often not most of it. It's arithmetic about what buyers in your area are willing to pay.

So which brings me to the thing I most want you to take from this segment. Your neighborhood has a ceiling. There's a price band that buyers around you have demonstrated with actual closed sales. And as your project pushes your home toward the top of that band, each additional dollar converts into less and less value. Push past it, and the conversion stops almost entirely.

So think about it from the buyer side. Because that's really all an appraisal is doing. Somebody's shopping in your neighborhood. They have a budget. And that budget exists because of what homes in your area have been selling for. They walk into your house and it's magnificent, genuinely better than anything else they've seen on that street. Do they pay thirty percent more than the top of the neighborhood to get it? Almost never. Because for that money, they can go buy in the next neighborhood up. Where the streets, the lots, and the schools all match the price.

They love your house, they just don't love it enough to overpay for the location it sits in. That's one scenario. And that's the ceiling. It isn't a rule somebody wrote down, it's the collective behavior of every buyer in your market. And no amount of quality on your part changes it.

Now, there's a word for what happens up there. And it's a real technical term the appraisers use. And almost no homeowners have ever heard it. The word is super adequate. A super adequate improvement is one that costs more than it contributes because it's more house than the market around it is willing to pay for. And here's the part that ought to stop you cold. Super adequacy is classified as a form of functional obsolescence. Obsolescence. That's a depreciation term.

So in the language of the profession that determines what your house is worth, an overbuilt home doesn't get filed under improvements. It gets filed under depreciation. Now I want to be careful here because I know exactly how that lands if you've already built one or if you're planning one right now. That does not mean you were foolish. It does not mean don't do it. Go back to what I said at the top. This is the data, not the verdict.

So knowing your ceiling doesn't tell you to stop at your ceiling. Plenty of people I've built for went right past it on purpose for reasons that had nothing to do with resale and everything to do with the life they were building. And every one of them was fine with it because they knew. What knowing your ceiling actually does is tell you the price of your decision. And that's the difference between being in the driver's seat and being a passenger. A passenger finds out later, a driver decides. So let's talk about how you decide.

William Reid (: 12:37

Okay, so now we put it together. You've got three returns and here's how you rank them for your situation, because this is personal and there is no universal right answer. So there's five questions. And be honest on all five because the whole thing falls apart if you're performing for yourself.

Question one, how long are you staying? This is the single biggest lever and it's not close. If you're selling in two years, financial return should be at the top of your list, whether you like it or not. The market is gonna have an opinion about your choices very soon, and you should care about that opinion. If you're staying twenty years, financial return drops pretty hard. You're gonna live inside this decision for two decades. The market will have its say eventually, but by then the kitchen you built will be dated anyway. And mostly what you've gotten is the 20 years.

If you genuinely don't know, then you plan for the shorter horizon and you'll be pleasantly surprised. And that's just a prudent decision.

So question two, what problem are you actually solving? Be honest here, because this is where people fool themselves in both directions. If the roof is failing, that's functional. It goes to the top and it doesn't get to be negotiated against anything because the alternative is water in the house. If the house genuinely doesn't work for your family, that's livability and it's legitimate. And you should say so instead of dressing it up in resale language.

And if you're honest and the answer is, I've wanted this for a long time, that's fine too. Say that. Wanting something is a legitimate reason to buy it. It's just not a financial argument. And problems start when people try to make it into one.

So question three, where do you sit against your ceiling? We just talked about this. If you're well below the top of your market, financial return is more available to you. And it's reasonable to weight it higher. If you're already near the top, be realistic that additional money converts slowly and rank accordingly.

So question four, what would you regret? I've asked people this for years, and the answers are revealing. Ask it both directions. What would you regret spending? And what would you regret not doing? Because there's a real cost to underbuilding. And it really never gets discussed. The addition you cut that you think about every single day, the ceiling you dropped to save money that makes the room feel wrong forever, the tenth time you say we should have just done it, that's a real loss. It just doesn't show up anywhere.

And then question five: what can you actually fund comfortably? Not what a lender will approve. Lenders approve numbers that make people miserable all the time. What can you pay without this project becoming a low-grade source of stress in your household for the next several years? And be careful with the word comfortably.

Comfortable isn't just the monthly payment, it's whether you can still take the trip, whether an unexpected expense is a problem or a nuisance, and whether you're going to resent this house every time the statement arrives. I've seen beautiful projects poison a household because the funding was technically possible and practically miserable. And that's a livability return running backwards on you.

So answer those five, and you have this ranked list: financial, livability, functional, in the order that's true for you. And I want to say that one more time because it's the heart of this episode. There is no wrong ranking. Somebody who puts livability first and knowingly accepts a weaker financial return has not made a mistake. They've made a decision with information. The only bad version is the one where you never ranked them and the project ranked them for you by accident.

William Reid (: 16:42

All right, let's get into this because this is where this stops being philosophy and starts saving you real money and real months. Most homeowners treat return on investment as something you find out about afterward or when an agent tells you. And I want you to treat it as something that drives design from the front. Because once you have that ranked list, every decision has a tiebreaker.

So think about what actually happens in the design development stage of the design process that I've gone over a few times in my past episodes. Design development is the second step in design where you're really getting into the details and making big decisions. So you're in a meeting, there's a choice, two options, different costs, both defensible, and everybody looks at you.

Without a priority, that decision gets made on feel, on whoever spoke last, on what you saw on your phone Tuesday night. With a priority, you have a question you can ask out loud. Which of these serves the return I ranked first? That's it. And that's the whole tool. And it will resolve most of the arguments in your project.

And here's the second thing it does. And this one is worth actual money. It stops you from paying to design things you were never going to build. Design is not free. You are paying professionals by the hour or by the phase to develop ideas. And when a design team doesn't know your priorities, they develop everything because that's their job and they're trying to give you options. Then the estimate comes back and you cut.

And every dollar of design work on things you just cut is gone. You paid for drawings of a house that isn't happening. I've watched homeowners spend months and real money developing a scope that anybody could have told them was never going to survive their own priorities. Not because the architect failed, because nobody ever told the architect what mattered most. And I'll put it back on the architect too, the designers. They can ask too. They can ask what the client priorities are. Sometimes that doesn't happen. And I've talked about that in past episodes.

But you as the stakeholder, you as the person writing the checks, you're the person ultimately that needs to stay in the driver's seat and convey your priorities.

And here's the third thing. And this is the one that surprises people. It changes scope creep from a mystery into a decision. Scope creep is not evil, it's normal. You get into a project and you see things, the wall's already open, so why not? That's how projects grow. And sometimes growing is right. But with a ranked list, every addition has to answer a question. Which return does this serve? And does it beat what's already in the plan? Sometimes, yes. Then do it knowingly. Sometimes no, and you just saved yourself 20,000 bucks without a fight.

And now the biggest one, and a lot of people don't apply this one. This could work before you even buy a property. Think about what we covered. The ceiling is set by the neighborhood. The financial return is governed by where the property sits in the market. The functional problems come with the house. Every one of those is knowable before you sign anything.

So if you're looking at a property to buy and renovate, you can run this whole analysis in advance. What does this neighborhood support? What would this house be worth finished? What does the work cost? And how does that line up against what I'm willing to invest and why am I doing it? This is not a renovation decision anymore. That's a purchase decision made with construction knowledge, and it's an enormous advantage.

So I've watched buyers walk away from properties because the math showed them the ceiling was too low for what they wanted to build. Better to find out in escrow than three years and a construction loan later. And I've watched it work the other direction too. Buyers who paid more than the other bidders and won the house because they were the only ones in the running who actually knew what the finished home would be worth. Everybody else was bidding on the house as it sat. They were bidding on the house they could see. So that's not luck. That's information nobody else at the table had.

There's a version of this for the property you already own, too. Sometimes you run these numbers on your own house, and the honest answer is that this property will not support what you want to build. The lot won't take it, the ceiling is too low, the bones are wrong. That's painful to hear and enormously valuable to know. Because the alternative might be to move rather than build.

I'd much rather have that conversation with you now over coffee than 18 months into a project you can't finish the way you imagined it. I've had that conversation. It's never a fun day, but not one of them has ever come back and told me they wish they'd found out later. That's the driver's seat. That's the whole point. Not the number itself. What the number lets you do early while everything is still changeable.

William Reid (: 21:57

All right, let's dig even deeper. So let's talk about what you actually need in front of you to do this well. Because this is where it stops being a conversation and becomes work. And there are five things. And most homeowners have none of them when they start a project.

Let's start with number one. What is your property worth today? Not your feeling about it, real comparable sales, closed sales, not listing prices, what people actually paid for homes genuinely like yours recently.

And then two, what your property would be worth when the project is finished. And this is the hard one. And it's the one almost nobody gets because it's really hard. It requires looking at comparable homes that already have what you're planning to build and understanding what they sold for. That's a comparative market analysis applied to a house that doesn't even exist yet. And most homeowners don't have a good way to do that, which is why you end up guessing.

And then three, what your project is likely to cost. Real numbers and the whole cost, not just construction. Design fees, engineering, permits, city fees, site work, furnishings if you need them, and then a real contingency to make sure that you're protected. And we've covered this in the estimating episodes. So I won't repeat it all here. You can go back and take a look at some of those.

And then four, what you can fund and how. Is it cash, equity, borrowing, or some mix of the three? And critically, what that actually does to your monthly life once the project is over and the payments aren't. This is also where a lot of people discover that funding shape changes the project. A cash project and a financed project of the identical size are not the same project because one of them has to survive a lender's opinion about value. And that opinion is going to run straight into the ceiling that we just talked about.

And then five, your ranking, the three returns we talked about in your order from the five questions in the last segment I just talked about. Put those five things next to each other and something useful happens. You can see the gap. The gap between what your project costs and what it's worth finished. The gap between what you want to spend and what you can fund. The gap between the house you're describing and the house your ceiling supports.

Those gaps are not failures. They're the actual decisions of your project showing up early while you can still do something about them. And the number that comes out the other side is what I call your investment goal. That's the amount you decided to put into the property. You arrived at it deliberately with all five of those things in view. Not a guess, not a construction estimate, a decision.

And it's the single most valuable thing you can hand your design team on day one. Which raises the obvious problem. Everything I just described is real work. Five sources of information. Most of them scattered and one of them nearly impossible for a homeowner to get on their own. And that is exactly what I'm building right now.

William Reid (: 25:19

Okay, so I want to spend some real time here because this episode is the problem. And what I'm about to describe to you is our answer to it. The platform is called BuildQuest. It's at buildquest.co and it's built around a simple idea of the whole planning process in one place, in the order it actually happens. So let me walk you through where this particular piece fits.

You start with what we call the project profile. And that's where you configure your project, what you've got, what you want, the scope of the project, everything a professional would ask you in a first meeting, asked properly and captured once. So you're not repeating yourself to five different people over the next year. And captured once matters more than it sounds because of how many times you otherwise have to tell your story. To the architect, to the engineer, to the three contractors. Everybody starts you over at the beginning.

And from there, you move to what's called vision spec, where you visualize the home you've been describing, because you can describe a room for 20 minutes and still have two people in the conversation picturing completely different things. People need to see it before they can decide anything.

And some of you heard me talk in the last episode, episode 70, about ProQuest. And that's the piece that helps you find and vet the professionals, architects, designers, and contractors using your actual project data instead of typing a keyword into a search bar and hoping. If you've missed that one, go back for it because finding the right people is its own subject.

So that's the shape of it. Configure the project, see the project, find your team, and in between all of that, understand the money. And that's where today's piece lives. So today I'm talking about cost compass, the money. And I want to describe it properly because it isn't one tool, it's two. And they only mean something when they're working together. One half figures out what the project is going to cost. The other half figures out what your project is going to be worth.

And cost compass runs them against each other and against the number you said you were willing to invest. Cost on the one side, value on the other, your investment goal right in the middle. And that's the whole machine.

So let me take you through both of those halves. Start with the cost side because it's the one people expect, and it's still the most underrated. Once you've configured your project, Cost Compass builds you a budget automatically from the project data. And it's aware of where you're building and the geographic and economic data that comes along with where you're building. And it's not a blank spreadsheet with a blinking cursor. It's not a template that you have to figure out. It's a budget built from what you actually told it about your project.

And that's the budget builder. That's where you can take my experience over the past 35 years, and I factor many other things in our proprietary software that I've developed or am developing, and we provide you a budget baseline that then you can go in and you can work with yourself. And you can either change your project, you can create new versions of your project, you can look at all the data points and you can develop your own budget. You may want to talk to one of your local builders about it, your architect, and you can craft your own budget. But I get you a really big head start.

That's the budget builder. And because it's driven by your configuration rather than typed in by hand, you can revise it, change the scope, create a version, compare versions side by side, which matters because nobody gets it right on the first pass. Real planning is iterative. You try something, you see the number, you adjust. Most homeowners never get that loop because their budget lives in a spreadsheet that's painful to change and out of date.

And also, a lot of homeowners just dive into a project with their investment goal that's based on nothing and end up waking up during the budgeting phase of the project with the contractor realizing that all the money and time they spent on the design has been worthless.

And now the other half. And this is the part I'm most proud of because it's the half nobody has. Same module, the cost compass module, the same project data. But now instead of asking what this costs, we're gonna ask what it's worth. You answer the investment goal question. What are you willing to put into the property? Sometimes regardless of the project itself, if you can think about it that way. You add your land value, your mortgage balance if you have one, the real inputs, and then you work inside a comparative market analysis right there to estimate what your finished project is actually worth in your market.

That's the piece I told you almost nobody can get on their own. Comparable homes in your area that already have what you're planning to build right in front of you, or at least really close. It's way better than guessing. And you factor this in while you're still making decisions.

So now here's why those two halves live in the same place. A budget on its own tells you what something costs. And plenty of people have a cost number and still have no idea whether it makes sense. A market analysis on its own tells you what homes are worth, but says nothing about your project. So you put them together and you get the thing neither one gives you alone. Three numbers side by side before you committed to a design.

What you want to invest, what the project is likely to cost, and what the market says the finished home is worth. That's the financial picture of your project, not a budget, not a comp report, the whole picture. And because both halves are driven by the same project configuration, when you change the project, everything moves at once. Bring the addition down to 200 square feet, and you don't just see a smaller budget, you see what it does to the finished value too.

Push the scope up, and you see both sides of that as well. That is design and money moving together in front of you while everything else is still changeable. That's the loop I've wanted homeowners to have for over 30 years.

Now, I want to say something about what this is for because I don't want it misunderstood. Cost Compass is not going to tell you what to do. It will not tell you your project is a bad idea because the return is thin. That's not its job. And honestly, it's not anybody's job but yours. Three returns and only you can rank them. If your project costs more than it adds and you want it anyway, for reasons about your life rather than your resale, that's your call. And it's a legitimate one.

But what Cost Compass does is it makes sure you're the one making it. With the numbers in front of you at the moment they can still change something instead of a year later when they can't. It's data, not a verdict. It's the driver's seat, not the passenger seat.

And one more thing before I move on, because I think it's the part that will matter most to the people listening who are early. Everything I've described happens before you hire anyone. You don't need an architect to configure your project. You don't need a contractor to see what the market says about your neighborhood. That's work you can do in the evenings at your kitchen table, months before anybody sends you an invoice.

And then you walk into your first design meeting with a project you've configured, a budget you understand, a market analysis behind it, and a number you can say out loud. And I've sat on the other side of that table. And I can tell you what happens when a homeowner walks in like that. Everything speeds up. The design gets better because the constraints are honest from day one. The estimate comes back closer because everybody was aiming at the same target. And the professionals treat you differently because you've shown in about four minutes that you're serious.

That's the outcome we're building for, not software for its own sake, a homeowner who walks in prepared. Cost Compass is in active development right now, and it's nearing completion. And if you want to see it as it comes together, you can go to buildquest.co and sign up for early access. It's not available yet, but I'm taking in names right now for a very select group of homeowners and I'm looking for design and construction professionals that would be interested too.

And I'll be closing that out as soon as we get close to the end of development. And there's a form in there you can sign up on and I won't pummel you with emails. I'll only send you information when it's important and helpful. And you'll be some of the first people into this program. And I'll be talking a lot more about all this as we get closer to the launch because there's considerably more to it than the one piece I walked you through today. So consider this the first real look under the hood when I do a private launch.

All right, so let's bring it home. There are three returns, not one. Financial, livability, functional. You can't rank them until you've separated them, and you can't make a good trade in your project until you've ranked them. The market sets a ceiling and your money converts more slowly as you approach it. Knowing where the ceiling sits doesn't tell you to stop. It tells you the price of the decisions that you're making. And that decision is yours.

If the numbers say thin and you want it anyway, do it knowingly. Overinvesting isn't the mistake. Overinvesting by accident is.

For this episode, I put together a worksheet to walk you through it. The three returns, the five ranking questions, the five things you need on the table, and a place to land on your investment goal. It's free, and the link is in the show notes. You can always go to the book and sections 1.030 through 1.033 of my book are where I lay out the investment goal in full along with the two-step method for building it from property values.

And if what I described to you in this last segment sounded like something you need, like I said, go to buildquest.co and sign up for the early access. It doesn't cost anything, and you'll be some of the first people to see what I've been building for the last two years.

And don't be afraid to download my book, The Awakened Homeowner, on Amazon. My whole agenda is in that book to help you as homeowners and to help design and construction professionals meet in the middle together so that we can produce a very productive, valuable experience for everybody, not just the homeowner, you the homeowner, or you the construction design professionals.

So thanks for spending your time with me today. I really appreciate it. And this podcast is just growing and growing with listeners, and I really appreciate that. And as always, I'm Bill Reid, your home building coach, and I'm here to enlighten, empower, and protect you. Let's go make it happen.