Unlike with many other kinds of investments, there are a number of things you can do to increase the investment value of your home.
This increase in value can result in a capital gain to you when you sell your home. Your capital gain is the amount you sell your home for, minus your cost basis. Your cost basis will be the principal amount you paid for the property, plus the value of any substantial capital improvements (e.g., building a patio, additional bedroom, etc.) you may have invested in, but not including the cost of ordinary repairs and upkeep. The good news is that most people who incur capital gains upon the sale of their personal residences will not have to pay tax on the gains, due to the current exemption limits. The old adage that the three most important attributes of real estate are "location, location, and location" is worth remembering when you buy a home.
If you buy or build in an area that is attractive to other homebuyers, chances are that the market value of your home will increase more rapidly. Important location factors can include:
Buying a home at different points in the housing market cycle also affects how the value of your home appreciates. If you buy at the beginning of a housing boom, your gains may be rapid indeed. Business and finance magazines often run articles about communities that are becoming popular places to live. Many of them will be in the early stages of a boom, while others will have already been caught in the wave.
Upgrading your house can also increase its market value. Capital improvements you make will increase the appraised value of your home and help you sell it for a higher price. Capital improvements can include adding additional living space—adding a porch, room or other addition, or finishing a basement or attic—or major refurbishing of existing space, such as remodeling the kitchen or bathroom. These kinds of improvements can increase your home's value by 15 to 20% or more. However, not all improvements add value. Some may even make selling your home more difficult, especially if they make your home "the most expensive house on the block" or cater to peculiar tastes.
While repairs do not add value as capital improvements do, they are essential to maintaining the value of your basis in the house. Leaky roofs, cracked foundations and the like can detract significantly from your home's market value, since buyers will either request that you repair them before the sale is closed, or deduct the estimated cost of repair from their offer.
Buying or building in the right location and keeping your home in good condition will maximize the return on your home investment.
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