Does it pay to put cash into your home?

Most home improvements don't yield a return on investment. You're better off putting your money toward retirement goals.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

NEW YORK (Money) -- Question: My home needs updating, but I'm planning to retire in five years and then move. Should I spend money on my house or should I continue putting my savings toward retirement? --Joyce, Pennsauken, New Jersey

Answer: The short answer is that you're probably better off continuing to save as much as you can for retirement over next five years.

That's not to say that you ought to let your house collapse around you in the meantime. Or that you shouldn't do anything to make it more appealing before you sell (or, for that matter, more livable while you're still there).

But I don't see the point of pouring any more money into it than you absolutely must.

Here's why.

You might have heard about the Cost vs. Value Report that Remodeling magazine publishes every year or so. The premise is simple. Researchers estimate the cost of various home improvement projects, such as remodeling a kitchen or bath or replacing windows, in many areas of the country. The magazine then polls real estate agents to see how much value each improvement would likely add to the house at resale.

If you look at the "Cost Recouped" column from this year's report, you'll see that the percentage of the cost you can expect to get back at sale for most home improvement projects is typically less than 80%, and in many cases below 70%.

Granted, as the magazine explains, there can be lots of variation in the percentage of cost you get back at sale depending not just on the project, but the part of the country you live in, the health of the real estate market in your area and the overall level of house prices in your area. And the payback figures don't reflect another aspect of the return you get on your money -- i.e., the pleasure you get from, say, living in a roomier house or whipping up dinners for friends and family in a kitchen fit for a gourmet cook.

But to the extent these figures are accurate, the report shows that purely as an investment home improvements don't measure up. You're not likely to get even your original principal back let alone a return on it. So it seems to me that diverting your savings dollars to a home improvement project on a house you don't expect to be living in more than five years now doesn't make a lot of sense.

That said, there might be instances in which it might pay to spend some money on your home before putting it up for sale. The price your home fetches when you sell it depends not just on the economy and the state of the real estate market in your area, but how your home stacks up against comparable houses in your neighborhood.

If your house has really fallen into disrepair or has a very dated look, it could create a very unfavorable impression with potential buyers. Everywhere they turn, they may see money they've got to plow into it just to make it habitable --- money, of course, that they'll deduct from their bid. In the worst case, the effect may be so unflattering that you'll get nothing but low-ball offers.

To avoid that possibility, you might want to consider going through your house with an eye toward finding ways to make it fresher and more appealing without spending a lot of dough. I'm talking about things like a fresh coat of paint in drab rooms, replacing worn carpet, repainting kitchen cabinets and changing the hardware and making sure the landscaping is neat and trim -- in short, improvements with a small price tag that can have a big impact.

Ideally, you'll want make these moves close to the time you intend to put your house on the market. In fact, before you spend any money preparing for sale, I suggest that you invite a few real estate agents in to make a pitch for listing your property with them. While they're there, ask them what relatively inexpensive improvements they recommend to increase your home's potential selling price. An experienced agent who's been in and out of hundreds of homes with hundreds of buyers should have a pretty good idea of which relatively inexpensive improvements have the most potential for boosting your selling price.

So I suggest that for now you keep your focus on saving for retirement. And when it comes time to get your house in shape for sale, remember: well-chosen low-cost improvements are likely to provide a bigger return on your money than splashy expensive ones. To top of page

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