How to Survive a Recession

LESSON 31: Do Home Improvement

For most families their home is their largest asset. Interest rate drops that occur in response to recessions reduce the cost of renovating and improving one’s home. Interest paid on home improvement loans is generally tax-deductible.

The key to getting maximum value from your home improvement dollar is to pay for things that add greater market value to the property. Generally this means improvements potential buyers can see, such as paint, landscaping, flooring, roof, and cabinetry. Installing a more efficient plumbing system may deliver more water but it does little to increase the home’s value (contrast this to plumbing repairs, which are preventative maintenance that prevents a reduction in home value caused by water damage). In comparison, adding on a room increases floor space and makes the property more attractive to potential buyers. This does not mean you should neglect repairs in lieu of cosmetic improvements, but focus on those areas that can be easily appreciated. Home improvements are an equity investment in real estate, which fits in well with the key sector portfolio strategy outlined elsewhere in this book. They have an additional benefit of being enjoyed by the occupants as well.

Improvements should not be limited strictly to your home. You can improve vacation property, as well as rental or commercial properties. Beware that near-term cash flow is a greater issue with properties you do not occupy. Improvements on rental and vacation property should be made only if rental income will cover at least a majority of the cash outflow. The tax benefits of improving rental or commercial property are limited, as well, making these types of improvements a logical second choice.

An additional opportunity exists for home improvement investments in the stock market. Big box home and hardware retailers such as Home Depot, Lowes, etc. become good stock investments as they tend to see strong sales growth during recessions as people stay at home and renovate. The same low interest rates that make renovations affordable to homeowners make it cheaper to finance large buildings and inventories, adding to the bottom line of home and hardware retailers.