Renovation is a frequently applied real estate technique. The basic rule of thumb in improving property is that big gains can be made bringing a below-standard house up to or just above the level of surrounding houses. Grandiose mansions built in average areas produce a very poor return on investment as the building (which is the depreciating part of the investment) makes up the majority of the cost. It is hard to believe that people don't understand this, but driving down the highway on the way to work each day I see enormous houses being built in mediocre suburbs on blocks facing right onto the highway. Obviously this rule of thumb is not apparent to everyone.

Notwithstanding the depreciation of buildings and plant, there are many people who make (or lose) money investing in improvements. I came across this very interesting comparison table based on a 1998 study of Egan National Valuers and Rawlinson's construction cost data, which most serious renovators would find very useful.

The data reflects pre-GST prices and of course it is now all quite old, however, I am not sure if that makes much difference today.

Note that minimal value adding occurs when the improvement is inappropriate for the property. A tennis court outside a derelict house will not bring the same gain as placing one outside a more upmarket property. A tennis court will add large amounts of money to the purchase price of an already expensive property, but won't impress ordinary buyers. Pools etc do so badly in loss-making because they are well known to be expensive to maintain and labour intensive. Not everyone would appreciate a bar area, such "improvements" do not count for much as their appeal is limited to only certain people and unlike a tennis court do not have a scarcity factor. Other valuable additions include reticulation, skylights and air conditioning units.

If you already do have a pool you can cut your losses by changing over to salt water chlorination and purchasing an efficient automatic cleaning system. They won't make the pool profitable, but they will make it less unappealing.

A good rule of thumb would be, do not spend more than 25% of the value of a property on improvements, be sensible and selective about renovations aiming to improve the enjoyment, uniqueness, practicality, security and comfort of a home.