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Real Estate Agents Don’t Understand Finance
Posted By Ron On November 12, 2009 @ 1:00 AM In Business,Personal Finance | Comments Disabled
Only in the crazy world of real estate can you hear something like:
“Your return on investment for a kitchen remodel is 100 percent.”
“Your ROI on a new deck or patio is 80 percent.”
“New granite counter-tops will return 100 percent.”
“Invest that $40,000 into a new bedroom and bathroom addition and you can expect a 90 percent return.”
Here’s a news flash for the real estate agents out there: Return On Investment (ROI) isn’t measured by the return OF your money, but the return ON your money. It’s how much MORE than you invested as a percentage of WHAT you invested.
For example: If you decide that a $40,000 new bedroom and bathroom addition is critical to the viability of your current home, a 90 percent ROI would mean that your home increased in value to the tune of $76,000, not $36,000.
In this case you received “back” $36,000 of the $40,000 you “invested.” To me, that isn’t an investment at all. Would you call it a “return” even if your investment was valued at the same amount? Real estate agents would call that a “100 percent” return!
Imagine investing $40,000 into a mutual fund and at the end of one year it was worth only $36,000. The real estate agents say, “ Congratulations! You’ll get a 90 percent return when you sell!” The financial guys say you lost 10 percent.
That is, if money is your only reason for doing it in the first place. Your upgrade may be something that your family needs. It may be something that improves your life or something that allows you to spend more time with your kids. It may be necessary from a maintenance standpoint (the floor is in bad shape or the cabinets are deteriorating). In those cases, it becomes much harder to quantify and only you can decide if the upgrade is worth it.
Don’t fall for the real estate agent’s definition of return on investment. You know better!
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