Is Home Improvement Better than Savings?
Updated: May 31, 2022
The following is in no way financial or tax advice. Please always consult a financial advisor and or tax consultant before deciding what to do with money.
Let's say, hypothetically, some homeowner in Los Angeles has excess cash of $75,000 they are looking to put into savings. Having cash parked in savings is always a nice thing. It's relatively safe and readily available if ever needed. However, it doesn't do much when it comes to making money. Even saving accounts with the highest yields only bring 4% APY maximum.
Therefore, is it worth putting that money into home improvements instead? $75k in LA could get various things from ADU s, room additions, solar roofing, energy efficient upgrades and renovations.
Let's start with ADUs. An Accessory Dwelling Unit is like a guest house in a backyard or on top of a garage. Defined as a granny or in-law unit by the County of Los Angeles, an ADU adds an entirely separate residence on a property. It can be used as an extra little house to live in or rent. An ADU can be up to 1200 square feet in LA county. A JADU, junior accessory dwelling unit is 500 square feet or less.
This type of home improvement would be better than putting the money in a savings account for many reasons:
It adds value to the home. Historically, house value increases more than money tucked away in a savings account.
These additions are counted as capital improvements and could save taxes in case of a home sale.
Since an ADU is a separate unit, it can be rented and generate income.
Since the housing shortage due to COVID, the city of LA has been more flexible in giving ADU construction permits. There are even certain cases where people can start building before getting permits.
Although not so rentable, home extensions offer the two first benefits of an ADU. They also provide immediate use and enjoyment. Depending on the type of improvement, the increase in home value can be up to 150% of the improvement cost. So, enlarging the living room or adding that extra master suite may not be such a bad idea. The same goes for renovations. Some or all of the money could redo the kitchen or bathrooms. Let's not forget that any energy-efficient home update such as adding solar, insulation, roofing, windows, energy-efficient appliances, and many other things, may qualify for tax rebates and energy credits from either or both federal and local.
Even with all this, some may say, the money is better off in savings since it's right there. That is an undeniable fact. The money from home improvement isn't that far either. After all, home additions, extensions, and remodeling immediately add equity to the property. Clients can easily borrow the money with our guidance and a few phone calls.
A skeptic could say, why do it now? The improvements can be done later and add the same value to the home. True enough, there is one reason to do it now and not wait; the cost of home improvements and remodeling is on the rise. Prices of building materials and labor, just like everything else, have increased by multiple digits. Some predict another 50% increase in the next 12 to 18 months. It's no wonder contractors in Los Angeles and everywhere else are so busy. Everyone is rushing to renew and remodel their house before another construction price explosion. It boils down to spending $75,000 on home improvements now or getting less for the same money later? Easy, no-brainer math right there, whichever way it's looked at, immediate, future value, or profit. Having it done now for $75,000 instead of $125,000 later brings a free added $50,000 equity and compounding the future value by that much.
The bottom line is that there's always something to be improved in a home; money is better parked there. It's a better bet to put the money in the walls first, then in savings or the stock market or crypto. The only thing that might outweigh placing the cash in home improvement and renovations is buying a new home. A home is always the first place to invest as it is the best long-term investment, the safest, with the highest returns historically proven around the world. Once the home is perfect and can't be improved, look for other ways to invest money. About the author: Neiv Levy has been in construction for over 20 years. He runs Giant Construction, a family-owned general contractor business specializing in luxury residential construction and renovation. With terrific refinement and an unparalleled ability to comprehend, Neiv has an uncanny way of resolving every issue with elegant simplicity.