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If you’re a homeowner considering a range of home improvements, you may not know if what you’re planning is a renovation or a remodel. Does it matter? Yes, because there are key differences.

A renovation is an update of an existing room or structure, while a remodel affects the design and purpose of an area. The more extensive work in a remodel will influence the cost and length of your project.

What Is a Renovation?

During a renovation, one or more rooms are updated and repaired. This might include new cabinets, flooring, and paint, for instance.

The bones of the room are typically left intact, though some structural issues may be fixed in a renovation, such as replacing rotting wood or swapping out window frames suffering from water damage.

A kitchen renovation might include replacing appliances, faucets, and knobs, while a bedroom reno might call for paint, new rugs, or new lighting.

Bathroom renovations often involve installing new tile, towel racks, and faucets.

Recommended: Home Improvement Cost Calculator

Advantages of a Renovation

Renovations are typically less costly than remodels, thanks to several factors.

You Can DIY

If you’re handy, you can slash some of the cost of hiring someone to undertake your renovation by doing some of the work yourself.

Because most renovations don’t require structural changes, you likely won’t need to hire licensed professionals to get it done. That means anything that you’re capable of — painting, wallpapering, floor sanding — you can do and pocket what it would have cost to hire help.

Just make sure you are skilled enough; hiring a professional to redo what you couldn’t complete may cost you money you didn’t plan on spending.

You May Get a Better Return on Investment

Since a renovation doesn’t call for major expenses like hiring licensed professionals or other construction-related outlays, in some cases the project offers more bang for the buck than a remodel does.

Renovation-related tweaks will still improve the look and feel of your home, and thus increase the value of your home, without the major expense a remodel entails.

You Can Expect Fewer Hidden Costs

When you’re renovating a room, your action plan is pretty cut and dried, and there aren’t likely to be surprises that require you to spend more than you planned.

Not so with a remodel, which, due to its scope, may result in additional costs to fix unforeseen problems such as hidden water damage, termites, or asbestos. These surprises can also lengthen the time of your project.

What Is a Remodel?

Remodels are typically more extensive than renovations. They include altering the function and sometimes the structure of an area of the house.

If your project calls for tearing down or adding walls, or changing the layout of a room, you’re planning a remodel.

Some examples of remodels: changing a powder room into a laundry room, knocking down a wall between a dining room and kitchen to create a great room, building an addition to your existing home, or expanding a closet into a dressing room.

Even if you’re not tearing down or adding walls, your project may be a remodel. This might include moving kitchen appliances around to improve room flow for a kitchen remodel, tearing out a tub and installing a walk-in shower in a bathroom, or turning a small guest bedroom into a home office.

Advantages of a Remodel

Many homeowners find there are pluses to a remodel as opposed to a renovation.

You Have the Opportunity to Customize Your Home

As homeowners grow with their home, they may find that their needs change.

Some may want an addition to accommodate an aging parent, while others may have expanded their families and need to convert a home office into a nursery or finish an attic and turn it into a bedroom. Empty-nesters may want to use one of their bedrooms as a study or gym.

A remodel affords them more options than a renovation does because they can make the necessary changes — however major — to achieve their needs.

You May Experience Hidden Benefits

Adding an island to a kitchen and removing a wall to create a larger space might mean more than increased room to prepare meals. You may find your family spends more time together in rooms that are spacious and inviting.

Similarly, retrofitting your heating and cooling system, adding under-floor heating, and replacing insulation might result in lower utility bills, freeing up money for hobbies or vacations.

Recommended: Guide to Buying, Selling, and Updating Your Home

Why a Remodel May Cost More Than a Renovation

All of that means remodels are costlier than renovations. Here’s why.

You May Need Permits

Thanks to the extensive nature of most remodels, many cities require homeowners to secure a permit before they begin work, especially if the project involves creating an addition to the home, or if new walls or new roofs are being installed. This is to ensure that building codes are followed.

If you need permits, you will want to factor in the time it takes to secure them into your timeline. Once the permits are approved, the project may begin. And once it is completed, it will likely need to be approved by a local inspector.

You May Need Professional Help

If your remodel requires electrical, duct, or plumbing work, you will likely need to hire a licensed professional to complete it.

You may also need a general contractor to hire and oversee these workers and others for larger remodels like adding a guest suite to the home or converting an attic to a home office with an en-suite bathroom.

These vendors, while necessary, can be costly since you are paying for their time in addition to any materials.

You May Be Dealing With Construction

While it can be exciting to imagine what your home will look like after a remodel, getting there can be taxing. That’s because you may be living in a construction zone while the project is underway.

It can be difficult to have to eat multiple takeout meals because your kitchen is being worked on, or deal with dust from work being done in the next room over.

If their remodel is especially extensive, some homeowners find they need to rent a home nearby until the remodel has been completed.

Recommended: 15 Ways to Keep Inflation from Blowing Your Home Reno Budget

Paying for a Remodel or Renovation

Whether you’re undertaking a renovation or remodel, you’ll want to have a budget and a payment plan. Some renovations are small enough that homeowners can pay upfront.

Those tackling remodels and larger renovations might tap a home equity loan or home equity line of credit, in which the home is used as collateral.

A home equity loan lets you borrow a set amount of money based on your equity in the home. You start paying it back in regular payments immediately, and if you don’t or can’t, you risk foreclosure. If you have a relatively solid sense of what your remodel will cost and are sure you can afford the added monthly payments, this could be a good option.

A home equity loan of credit (HELOC) also draws on your home equity but offers more flexibility. Instead of getting a lump sum, you can access a revolving line of credit (up to a set maximum) and draw from that when you need it, paying interest only on what you’ve taken out. Usually the “draw period” (the time during which you can pull out funds) lasts for a number of years, which should cover even lengthy remodels. However, when the draw period is over, your payments of principal and interest will depend on what you’ve taken out, so they can be less predictable than home equity loan payments. And if you default, you could lose your home.

Recommended: Home Equity Loans vs Personal Loans for Home Improvement

The Takeaway

Undertaking home improvements can be exciting for homeowners. But before you embark on a project, know whether you’re looking at a renovation or a remodel, how much inconvenience you’re prepared to put up with, and what you are willing to pay.

SoFi now offers home equity loans. Access up to 85%, or $350,000, of your home’s equity. Enjoy lower interest rates than most other types of loans. Cover big purchases, fund home renovations, or consolidate high-interest debt. You can complete an application in minutes.

FAQ

What is the difference between a remodel and a renovation?

A renovation involves making minor updates and/or repairs to an area in your home. A remodel is larger in scope and can include making structural changes to your house, like taking down walls or adding new rooms. Typically, a remodel is more expensive than a renovation.

How much does it cost to remodel vs. renovate?

A remodel is typically more extensive than a renovation and generally requires professional help, so it’s a more expensive proposition, potentially costing thousands of dollars. A renovation is usually more limited in scope and may be largely cosmetic, meaning that if you’re handy, you may be able to do much of it yourself, which can keep the cost much lower

Is painting considered a renovation?

Yes, painting walls or cabinets in your house is generally thought of as a renovation, since it’s essentially cosmetic, rather than a structural change. Other common renovations include installing a smart or programmable thermostat, changing light fixtures, replacing cabinet hardware, and putting in a bathroom vanity or new faucets.

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Investors looking for a value investment that typically provides steady income without much volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally stable investments. Investing in utilities is considered to be low risk compared to other types of stocks, since utility companies are regulated entities with few competitors.

Plus, their profits and expenditures are very predictable, so they tend to provide steady performance. Utilities are a constant in modern life — people always need them — so utility companies tend to ride out economic downturns without significant volatility. As a result, utility stocks may provide higher dividends than other fixed-income assets, though they may not offer substantial growth potential.

What Are Utility Stocks?

The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.

The utilities sector includes companies that generate traditional power as well as alternative and sustainable energy (sometimes called green energy), in addition to companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.

There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market.

It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant competition.

Who Should Invest in Utilities Stocks?

Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.

Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed-income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.

Choosing Utilities Stocks to Invest In

There are a number of ways to evaluate a stock in a utility company before buying it — here’s what investors might want to consider.

New Utility Companies and Emerging Markets

Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.

Companies with Moderate Dividend Payouts

Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.

Undervalued Utility Companies

Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.

Utilities with Healthy Credit Ratings

Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.

Other factors to consider when choosing utility stocks:

•   The region in which the company operates

•   The regulatory market in that region

•   The utility the company provides and its business model

•   The dividend rate

•   The company’s financial performance

Investors who want to gain exposure to a broad cross-section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.

Benefits of Investing in Utilities Stocks

There are several reasons investors choose to add utility stocks to their portfolio:

•   They tend to pay out higher dividends than other fixed-income assets and stocks.

•   They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.

•   They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.

•   They can be less volatile during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.

•   They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.

•   Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Downsides of Investing in Utilities

Although there are many reasons to invest in utilities, like any investment, they come with some downsides:

•   They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.

•   They don’t often provide opportunities for significant short-term growth. Here, their stability can be seen as a negative.

•   Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.

•   Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.

•   Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.

The Takeaway

Investing in utility stocks can be a good way to diversify a portfolio by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy — and that allows utility companies to weather economic downturns relatively well.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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