Home addition vs selling/moving.

Nashville, Tennessee
Rehabbing & House Flipping
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Home addition vs selling/moving.

Andrew Cameron
New to Real Estate · Nashville, TN · Member since 2022 · 2 posts · 1 vote

My wife and I live in a 3 bed 2 bath approx. 1500 sf home she bought in 2016 or so. We've realized our family is going to need a bit more space in the next couple years, but, unfortunately, we cannot afford to buy more space in our area. Moving is not an option as we'd have to go so far from our jobs as to be impractical, and so I'm looking into building an addition. I've been given a rough range of $175-220 psf for addition costs by a contractor, and that tracks with our neighbors who are doing a renovation with a different contractor a couple blocks away.

The way I see it right now, adding on to the house would force equity. Our house is currently valued around $320-330 psf. So we'd be "making" $100-115 in equity psf. Since we can't afford to buy another house, I thought this may be a way to take the next step in building our equity/future portfolio. We could rent the space out short term to help offset the cost, and when we do go to sell or refinance, we have built in additional equity to deploy elsewhere. Am I thinking about this correctly? What are the angles I'm not seeing? Is adding on a bad investment compared to selling the current house and buying a larger one?  

Any thoughts/insight would be greatly appreciated! Thanks!

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Andy SabischPro Member
Investor · Jackson, MS · Member since 2021 · 660 posts · 561 votes
3y
As Esta said, there is a difference in an addition versus what a home is appraised at.  Adding an addition does not simply equate to what your current house is valued at psf x the new total sq ft.  If you are expecting an addition to bring instant equity, you need to do some checking with local realtors or see what the market is supporting.  Look at houses similar to yours now and then see what houses with the additional sq footage are selling for and see if what you are planning to put into the property makes sense.  Some areas it does and others it does not . . . . in our areas (central Mississippi and NE Pennsylvania) it would not based on what the market supports.  Put on an addition will add value but the question you need to get confirmation on is will it offset the cost of the addition in your area?  If you now have the biggest house in the area, that is never a good place to be in.  If you are going to have the most updated house in the area, also not a place you want to be in to have a wide market looking at the property when it comes time to cash out.  Are you planning on paying cash, financing or getting a HELOC for the project?  See what the cost associated with that does when it comes to the true cost of the project.  But getting input from multiple realtors that know the area to see what the value added will be will make your decision clearer . . .

Hope this helps
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  • Esta Ryder
    Member since 2023 · 101 posts · 67 votes
    3y

    The problem with an addition is that the cost of the addition is rarely a dollar for dollar return.  With a remodel, maybe (hence why people flip homes) but in a construction addition, not so much.  So you just want to make sure that this property is where you want to stay for quite some time.  For example, a few years ago, we added a first floor master with full bath and walk in closet plus first floor laundry.  Our total cost was $80K.  The only two upgardes we did were full exterior stone and a new roof onn the entire house.  No tile shower, etc.  From one appraisal to another (within a year of each other), the addition only added $20K in value.  I'm definitely not trying to discourage an addition.  I love ours! I'm just saying make sure that you are confident that you are staying in the home long enough that an addition makes sense.

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  • Andy SabischPro Member
    Investor · Jackson, MS · Member since 2021 · 660 posts · 561 votes
    3y
    As Esta said, there is a difference in an addition versus what a home is appraised at.  Adding an addition does not simply equate to what your current house is valued at psf x the new total sq ft.  If you are expecting an addition to bring instant equity, you need to do some checking with local realtors or see what the market is supporting.  Look at houses similar to yours now and then see what houses with the additional sq footage are selling for and see if what you are planning to put into the property makes sense.  Some areas it does and others it does not . . . . in our areas (central Mississippi and NE Pennsylvania) it would not based on what the market supports.  Put on an addition will add value but the question you need to get confirmation on is will it offset the cost of the addition in your area?  If you now have the biggest house in the area, that is never a good place to be in.  If you are going to have the most updated house in the area, also not a place you want to be in to have a wide market looking at the property when it comes time to cash out.  Are you planning on paying cash, financing or getting a HELOC for the project?  See what the cost associated with that does when it comes to the true cost of the project.  But getting input from multiple realtors that know the area to see what the value added will be will make your decision clearer . . .

    Hope this helps
    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Andrew Cameron:

    My wife and I live in a 3 bed 2 bath approx. 1500 sf home she bought in 2016 or so. We've realized our family is going to need a bit more space in the next couple years, but, unfortunately, we cannot afford to buy more space in our area. Moving is not an option as we'd have to go so far from our jobs as to be impractical, and so I'm looking into building an addition. I've been given a rough range of $175-220 psf for addition costs by a contractor, and that tracks with our neighbors who are doing a renovation with a different contractor a couple blocks away.

    The way I see it right now, adding on to the house would force equity. Our house is currently valued around $320-330 psf. So we'd be "making" $100-115 in equity psf. Since we can't afford to buy another house, I thought this may be a way to take the next step in building our equity/future portfolio. We could rent the space out short term to help offset the cost, and when we do go to sell or refinance, we have built in additional equity to deploy elsewhere. Am I thinking about this correctly? What are the angles I'm not seeing? Is adding on a bad investment compared to selling the current house and buying a larger one?  

    Any thoughts/insight would be greatly appreciated! Thanks!


    1. you really need to talk to appraisal, not to the realtor
    2. each county/appraisal has its own rules when counting "addition".
    3. the addition, has to be permitted in general and has to be reported to the city.
    4. it becomes more complicated, if the addition is not conditioned to be the same to the main house or if it's not on the same floor.
    5. hence, consult appraisal again, privately, before any addition.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    If you want to stay in the area, an addition is a good way to expand your living space.  It may not always make financial sense (ie dollar for dollar return on your investment in the short term), but also factor in how much it would cost you to move, buy and sell a home and it may be the best option.  Also look at what you have and if you can get rid of anything or move things around to make more space.

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  • Andrew Cameron
    OP
    New to Real Estate · Nashville, TN · Member since 2022 · 2 posts · 1 vote
    3y

    Hey everyone, thanks for all the insight. I really appreciate you taking the time to help me analyze this. Sounds like my next step needs to be talking to realtors/appraisers in my area.

    Thanks again! 

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Andrew Cameron

    When evaluating an addition, taking the current value divided by the square footage and thinking that the home will increase in that value is unfortunately not the way it works.

    You would need to look at similar size homes if your future size to see what they are worth.

    This decision really should not come down to price since it does not seem like the cost of the addition is a concern and what it should come down to is what is best for your family.

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