Renovations that Pay Kitchens, Bathrooms, Decks, Garages
By Lisa Gibbs

(MONEY Magazine) – Like reality TV and cutting carbs, home improvement has become a national obsession. Americans spent a record $124 billion on remodeling projects in 2003, and we didn't scrimp. We're treating ourselves to granite countertops and built-in cappuccino makers, whirlpool tubs and extra fireplaces. Sacramento remodeler Darius Baker says our hunger for pricey options such as hand-painted tile backsplashes has propelled the cost of his average kitchen redo from the mid-$30,000s to the mid-$50,000s. In an era of rising home prices, remodeling our homes has been a smart investment. On average, we gained more in property value from 15 typical makeovers in 2003 than we did in 2002, according to Remodeling magazine, which supplied us with most of the numbers on these pages. In some cities, such as San Francisco and Boston, most renovation projects returned, on average, more than twice their cost in resale value. Kermit Baker, a housing researcher at Harvard, notes that homeowners in areas where values are accelerating have more equity to spend on improvements and are more interested in protecting their housing investment. Still, some home improvements are better investments than others. On the next few pages, we'll tell you what you can get for your money from three popular projects--kitchens, baths and decks. We'll also advise you how to tackle the sticky question of whether to remodel or buy a new home (see page 115).

First, some general principles to keep in mind: Remodeling pays off the most in the hottest real estate markets. Remodeling estimates that in Miami, where housing prices have escalated 70% during the past five years, adding a master bedroom suite would return 131% upon resale vs. 40% in Buffalo, when the house is sold within a year. Competition from new construction is also a factor; in Phoenix, which has an ample supply of recently built developments, the return on a master bedroom addition is just 49%.

The second most popular saying in real estate, after "location, location, location," is "kitchens and baths sell houses." Cramped, outdated kitchens and baths crimp the value of a home. Adding outdoor living space is also a surprisingly good investment: A backyard deck returned an average 104% of its cost.

Another tip: Stick to classic materials. Stone countertops, stainless-steel appliances, wood cabinets and hardwood floors are options worth paying for.

Finally, remember, your house is an investment you live in. So don't focus so much on recouping costs that you don't do what makes you happy. (If you love wine, buy the built-in wine cooler. It won't pay for itself, but so what?) Says builder Jim Krengel: "People spend so much time worrying about the next person. Do what's going to make you feel right at home."