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A condo in Vancouver August 26, 2009. John Lehmann/Globe and Mail (John Lehmann/Globe and Mail)
A condo in Vancouver August 26, 2009. John Lehmann/Globe and Mail (John Lehmann/Globe and Mail)

Dough

Condo reno? Talk about diminishing returns Add to ...

We live in the generation of the renovation. Granite countertop upgrades, hardwood-floor installations, a wall removal here, some feng shui there. There are so many television shows centred on renovations that you might start to feel abnormal if you aren't doing something to your home. Then again, with so many people living at or beyond their means, why would you want to be normal?

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There are two major reasons why you would want to renovate your home: You want to improve your living space or you are making an investment that will increase the value of your home above and beyond the cost of the renovation. My beef is with people who use the latter reason to justify being financially irresponsible.

Don't get me wrong, I don't have anything against upgrading your living space, even if you don't get a positive return on your investment. You just need to be able to afford it, and it would be nice if it didn't end your relationship, either.

For example, perhaps you are looking at an extensive upgrade to your condo. According to Christine Rivard, a real-estate representative with Re/Max First Realty, you need to consider the factors that affect your condo's value: "If the value of the condo is perceived by the neighbourhood, amount of space offered and/or amenities provided by the condo corp., renovating may not be an important factor in achieving desired return as would market timing."

Ms. Rivard adds that if the condo is located in a "hot" area, where demand is greater than supply, "renovating would be a waste of money."

But let's say your $50,000 renovation increases the value of your home by $75,000. That's a total return of 50 per cent on your investment. That's great if you're a flipper, but what if you're living in that home for 10 more years? Your annualized rate of return is only 4.14 per cent - and that assumes the upgrade you made is as desirable 10 years from now as it is today. Tastes change. Maybe people will think it's hideous in a decade, in which case it may hurt you.

You are also forgoing the use of that $50,000. If you borrowed it, your cash flow is tied up paying it off. If you paid for it in cash, you have to weigh the opportunity cost - what might you have earned if you had invested the money instead?

So like I said, I don't care if you renovate. Your new environment may bring you great pleasure and pride and that's great. If you can afford it, go nuts.

But if it puts a strain on your finances, don't fall into the trap of justifying it because it's an investment, when really you just want to keep up with the Joneses.



Preet Banerjee is the W Network's money expert and a senior vice-president with Pro-Financial Asset Management. His website is wheredoesallmymoneygo.com

 

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