Investor Toolkit: How renovations can hurt your profits when investing in real estate

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “Home improvements raise home values less than you think.”

Owning your primary residence can be a great financial deal. Mortgage payments amount to forced savings, a home is an inflation hedge, and capital gains are tax-free. But don’t fritter away your gains by excessive upgrading, or frequent moving.

• Neighbourhoods limit home prices. Suppose nearby homes sell for $325,000 to $375,000. You spend $60,000 on your $350,000 home. Your new roof, furnace, etc. only raise your home’s value by $25,000, to the area’s top price of $375,000. As well, your renovations may not appeal to all buyers who are investing in real estate. For example, they may be more interested in room and lot size, the home’s layout or other factors.
• Likewise for additions. A new second floor or extra room may suit your needs, but will likely raise your home’s value by only half the cost of the extra room or floor. Additions are more costly and less functional than original construction, and buyers may have different needs than you.

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• Swimming pools are an even worse choice for investing in real estate. That’s because buyers who don’t want the expense or work of a swimming pool may cut their offer to reflect the cost of filling it in.
• If you move, you’ll have to pay real-estate commissions, plus lawyer’s fees and related costs, as well as moving and possibly redecorating expenses. You may also face costly repairs to your new home if the seller skimped on maintenance.

Solution: When buying a home, try to choose one that will suit you and your family for as long as possible. That way, you limit your need to renovate or move. If you own a home, treat home-improvement or moving expenses as consumer items, not investments. They may provide enjoyment, but not profits.

Same goes for recreational properties: From an investment standpoint, we continue to believe the family home provides all the real-estate exposure that most investors need. If you’re planning on investing in real estate for recreational purposes, such as buying a cottage or a ski chalet, you should do so mainly for enjoyment. That’s because these properties generally appreciate at a much slower rate than, say, a home in a major urban centre. Moreover, unlike your primary residence, you must still pay tax on gains on the sale of a recreational property.

Next Wednesday, August 25, 2010, Investor Toolkit will show you some tips for making lower-risk profits in technology stocks.

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