Purchasing a home is a huge investment and it’s important that your ROI (return on investment) will measure your investment’s profitability when it comes time to sell your home. However, many people expect their return on investment to be larger than what it actually ends up being. A variety of factors can explain why your ROI isn’t as much as you had hoped when you bought your house:
The condition of the housing market has the biggest impact on your ROI. However, this is a factor something you cannot fully control. In a thriving economy, real estate investments can be very profitable. The opposite is true for a recessionary economy. If the market experiences a downturn, you could even end up owing more money than what your home is worth. Markets can be fickle, and there are no guarantees. Given the choice, watch the market and try to sell at the best time and season.
In addition, property values and rates of appreciation fluctuate from one neighborhood to the next. Environmental factors like school and job proximity and supply and demand have an effect on how long your home could take to appreciate in value. Changes like these can negatively or positively impact a neighborhood.
When calculating your ROI, there are often many costs that people don’t think to weigh in. Without adding these into the equation, the ROI can be a lot higher than expected. Commonly ignored costs to consider:
Value of Renovations
A lot of people have the misconception that renovating your home will return more than the cost. Instead of big additions to the home, think smaller with replacements. These will give you the most bang for your buck. When additions get to be too much in comparison to the neighborhood, you end up pricing it out of location.
By only sprucing up these key rooms, you’re likely to get a better return on the renovation:
- Converting attic space
It’s important to recognize why your ROI was smaller than expected and that it was not due to bad investment. If you need advice on investing in real estate or about your current investment, talk to your financial advisor.