There are three types of investments people typically make in their personal homes:
Real Estate .. Lifestyle .. Maintenance
In terms of understanding what adds value (equity) to your home, it is important to be able to separate these types of expenditures in your planning. Because your home is probably the biggest investment you will make, you will want it to be both a secure and a very profitable investment.
Making a real estate investment means putting money into your property which will be returned when you sell your house. To make a wise real estate investment, build your home commensurate with the size of the property and the surrounding environment. If the value of the house is not as great as the value of the property, you may end up with a house which will be torn down following its sale. This is especially applicable to waterfront or view properties. However, building a large ostentatious house in a neighborhood of smaller homes can be just as detrimental, as your home will appear and feel out of place. Therefore, choose your property based upon your initial ideals and the appropriate surrounding neighborhood or environment.
Lifestyle investments add personal enjoyment but not objective value to your real estate. Using special materials or designs to achieve a certain look or installing hot tubs or saunas are lifestyle investments, and will generally not increase your home's resale value. Although there are certain locations or extenuating circumstances where such amenities will indeed add value, it is best to be aware of, and mentally separate the kinds of investments you are making in your home. Be willing to concede that some may not yield an increase in value.
Maintenance is the joy of home ownership. The initial expense of maintaining your home is not going to add dramatically to its immediate value, but investing in a home which has already been well-maintained will certainly enhance its value and give you many years of unaggravated living as well. Recognize and separate what is maintenance and what is immediate equity building. For example, replacing the roof is simply good maintenance and should generally be thought of as such in the budgeting process.
Remodeling as an Immediate Investment
Understand that returns on equity gained on remodels are only about 85%. An existing house has value before the remodel takes place and in order to make changes, you must pay someone to tear some of the value from the house, and throw it away. Then you pay for the new materials and new work. The incremental value lost is typically about 15%. Fortunately, within a few years of ownership, this lost value is usually more than replaced through appreciation.