Does adding a bedroom guarantee significant home value increase?

Question

We are planning to do a cash out refinance soon on our SFH at 80% LTV to get as much cash out as possible to invest in our first rental investment property. We have a 4BR 2B, 1800 sqft home in Waltham, MA, and considering finishing our expansion attic to add a 5th bedroom and approx. 460 sqft living space.

Before we move forward with finish the attic, we are looking to find out how much value this would add to our home. We have looked at comps in the area, but it has been challenging to find clear differentiation between 4BR and 5BR homes with similar square footage.

Does anyone know if there is a better way to evaluate this potential project? Is it possible for an appraiser to provide an estimated appraisal based on the proposed work?

Thank you!

Aaron K. · Answer

@Kristen G. you likely won't get much if any value from a 5th bedroom almost all of the value would come from the additional square footage, not to mention that most converted attics require lower and slanted ceilings and don't always have easy access to the rest of the house, if you were planning on doing it just for financial reasons it will probably be a net loss.

Kristen G. · Answer

@Todd Wheatley

Great, this makes sense. Thank you again for your insight. We really appreciate the guidance!

Todd Wheatley · Answer

@Kristen G. - Happy to share my opinion on the matter but please keep in mind an opinion is all that it is as I am not an appraiser.

Your lot square footage would certainly be considered during an appraisal and thus factor into the estimated value. Taking the time to run high quality comps would include filtering out much smaller and/or much bigger lots. The property type (e.g. cape, colonial, etc) would also come into play. The distance to various comp properties as well.

In a vacuum though your thinking is right. Adding additional living space can be a cost-effective way to increasing a property's value.

Todd Wheatley · Answer

Hi @Kristen G.

I agree with Aaron's assessment that the majority of the value would come from the increase in square footage and not necessarily the addition of a 5th bedroom. Some back of the envelope math below...

Looking at Waltham comps for 4 and 5 bedrooms SFR's. Last 9 months for 4 beds and last 12 months for 5 beds (to ensure large enough sample size). Average $/ft shown below (NOTE: no consideration given to quality of comp vs subject). If you are strictly looking for maximum appraisal value then perhaps consider it if you can develop/finish the attic space well below the $314 $/ft average for a 5 bedroom.

However, other factors you may want to consider are increased operational costs (e.g. heating, cooling, etc) that will stay with you well past the cash out refi. Furthermore, would this eliminate all of, or most of, the available storage at the property? This could have a negative impact on resale value when that time comes.

Good luck with whatever you decide to do!

Kristen G. · Answer

@Todd Wheatley Thank you so much for the detailed reply. This is a big help. Also didn't think about storage.. we do not have a basement and the attic is our only real place for storage. Thanks again!

Kristen G. · Answer

@John Teachout

This is a good point. Yes, we have room for a bathroom in the attic/third floor. We plan to add later on.

For now, we are planning to use this project to quickly increase the home value  for the cash out refinance.

John Teachout · Answer

Could a bathroom also be added to the attic? ie, an en suite? A bedroom on a floor with no bathroom doesn't seem too appealing.

Kristen G. · Answer

@Todd Wheatley

Thanks again for your advice! Can you tell me if we’re understanding this right..

Based on the comp averages listed, if we were to finish the attic space to increase our square footage to from 1800 to 2260 sqft, (+460sqft) the estimated home value would increase from approx. $640k to $804k? (Using $356.56 $/ft for 4 BR).

Also, do you happen to know how the square footage of our lot would affect our cost per square foot? Our lot is 3550 sqft and a lot of the comps we’re seeing seem to have bigger lots.

We understand these are just estimates, but looking to get a better idea if this project will increase our property value enough to get more cash out during the refinance. We expect the project to cost about $5k as the attic is framed and the electrical is in place.

Thank you!!

Kristen G. · Answer

@Aaron K. Thank you for the reply, this is helpful - I appreciate the info!

Does adding a bedroom guarantee significant home value increase?

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