Adding Square Footage - Worth It?

Question

Aloha Bigger Pockets!

How do I assess the value in adding square footage to a property?

I’m moving to Southern Illinois from Hawaii and am currently under contract to buy a duplex in the area. My plan is to house-hack it with this property and hold onto it as I take my first steps into Real Estate Investing.

The duplex is 4 bed/2 bath (2 bed/1 bath each) with a total of 1800 square feet. So it’s small and the layout doesn’t offer up the most functionality for the livable space. I’ve been wrestling with the prospect of reconfiguring the layout/adding additional square footage, but since I’m so new to real estate I’m struggling to determine whether or not I would see a return on any of the money I would put into those changes.

I’ve done my best to research and draft up estimates, but figured I might as well turn to the Bigger Pockets community to see what advice could be had.

Mahalo for your time and thoughts!

Rick Albert · Answer

I was watching a video of a house hacking realtor and they brought up looking at the average price per square foot in an area and using that metric.  I strongly disagree with this model and made me think of this post in case that was a thought.

Here's why the PPSF model doesn't work:

Taking the medium PPSF only works if there is an even number of like properties.  For example if most of the properties in the area are fixers, then that lowers your PPSF average, when it could actually be worth more.

The second reason every square foot is different.  Expanding a bedroom may not give it nearly as much value per square foot as adding an additional bedroom or bathroom.

The third reason is the median PPSF includes the lot size.  For example, you buy a 1,250 square foot house on a 5000 square foot lot for $500,000.  That's $400/square foot.  If you add 100 square feet to a home, that doesn't give you an additional value of $40,000 because it wasn't like you expanded the land as well.  If say the land is worth $250,000, then $200/square foot of the $400/square foot is allocated to the lot.  Therefore adding 100 square feet is arguably only worth $20,000.

That's why looking at comps is so important.  It is also why you will notice the larger the home, often the lower the price per square foot.

Just a thought I had and wanted to share.

Bryan Andrews · Answer

@George Skidis - I’m actually leaving Hawaii, moving back to the Scott AFB area, and am under contract to purchase a duplex in O’Fallon, IL. Sorry if my original post was misleading.

I really appreciate the advice and perspective. It seems like I should be conservative with any additions/remodeling, aiming to hold onto as much of my own money as I can and increase the property’s cash flow, especially since this is my first step into real estate investing.

I also noticed the Illinois REIA logo in your signature block and am going to take your advice join now!

Thanks again for the advice!

-Bryan

Jonathan Klemm · Answer

@Bryan Andrews - That makes sense.  Well I guess you can dive into RE, finish up your active duty in IL, and then when you are swimming in money you can move back to Hawaii.

I agree with your renovation thoughts.  I remember my first property up here in Chicago, I had all these ideas and then you start and it takes longer and costs more than you expect.  Get the first one done, learn, and then on to the next!

George Skidis · Answer

Check your comps and do not overbuild. In a traditional Real Estate market adding to a property will not increase the value enough in the short run to cover the cost of the improvement. It takes years to recover the upgrade. The other problem is building outside of the norms for a particular neighborhood. Normally, no one builds a mansion in a blighted area. However, I am aware of one in Sauget, IL right next to a chemical plant and copper works.

However, Hawaii is a different animal all around. From what I have heard Real Estate in Hawaii is extremely expensive. So is the cost of importing the materials for an upgrade.

My normal advice to homeowners and investors is that if they want a bigger house buy a bigger house. But Hawaii is outside the norm.

Before you move and buy do the following.

1. Check for a local Investor association on the island you are moving to and join it NOW.

2. Develop Real Estate Agent connections and get the comps in a three mile radius. Also find an appraiser and get their opinion.

3. Make sure you can afford the materials for the upgrade. The five islands must IMPORT almost everything but pineapples and sugar cane.

4. Determine if your current income is sufficient to live in Hawaii before the upgrade. Prices are higher for food, utilities, gasoline etc.

5. Good Luck and I hope you succeed.

Bryan Andrews · Answer

@Jonathan Klemm - It goes without saying that I would’ve much rather stayed in Hawaii, but I’m serving Active Duty in the USAF and my tour at Hickam was up so it was time for me to move back to Scott AFB. Silver lining: it will be a little easier for me to get into real estate out here!

I’m considering two separate options for the rental, depending on cost/pay off:

-Simply reconfigure the layout and make it more functional and appealing to renters.

Or

-Add square footage (possibly a bed/bath) and hopefully increase the value, functionality, and what it could bring in for rent.

But seeing as how this is my first investment property my gut is telling me to play it a little more conservative and let these ideas simmer before pulling the trigger.

Jonathan Klemm · Answer

@Bryan Andrews - Not sure I've heard of someone moving from Hawaii to Southern Illinois - there must be a pretty good reason.  Just curious where in Southern Illinois?  I am up in the windy city, Chicago.

If you were simply reconfiguring the layout how would you be adding square footage, wouldn't it just be making it more functional?

Nonetheless, you should be able to just search other comps in the area figure out what the $/SF of other houses are, and then multiply that number times the number of square feet you are adding.  Obviously, that isn't a straight line correlation since comping is subjective and home values are always fluctuating.

Allen L. · Answer

Thanks for your question and this WAS one of top questions for every property purchased when I just started... my experience is generally no it's not worth it *especially* given your asset type. Most appraisers are not simply going to apply a sqft * mkt value per sqft to arrive at your appraised value, and 900 sqft per 2br duplex is typical. Also moving around walls and opening up kitchen is okay for a higher price level flip but for a rental it won't pay off, and you will likely add on some delay and increase cost as you will likely need a permit to open up walls.

I'm a huge fan of Hawaii and you might not be able to tell, but that's Iao Valley in my picture's background.

Bryan Vukelich · Answer

Hi Bryan, congratulations on getting your offer accepted - not all that easy in this market.  What island is your duplex on?

And here in Hawaii, adding sq. ft. to a property generally a great thing to do - but I agree with Rick, check out comps, and see if the extra space will give you a decent return on your money.

And want to highlight a few important things:

* Although it is usually takes a long time, I highly recommend you get all necessary permits.  If you do an addition, the appraiser will not give you any value for it if it is not permitted.  Plus, when it comes to sell, many potential buyers like to see that any remodeling work was permitted.

* At least on O'ahu, quality contractors are quite busy here right now.

* It is pretty challenging to find some materials right now.  Recently, I've seen some fix/flip opportunities be put back on the market because the originally investor doesn't want to hold the property until materials arrive on the island to finish the job.

Wish you well, and if I can be of value to you in any way, contact me at any time.

Rick Albert · Answer

The best thing to do to determine adding value is comparing to other duplexes in the area.  The other thing to keep in mind is what does that addition do?  For example, is it an extra bedroom or bathroom?  Appraisers will give value per square foot AND additional value if there is a bedroom, bathroom, etc.  Alternatively, look at the square footage of your property and compare to those that are larger to see if there is a big jump once you pass a square footage threshold.  For example, in Los Angeles, I notice a big price difference between homes less than 1,500 square feet and those larger.  Therefore, when we did our addition in our house hack, (adding a family and dining room area), I noticed a big jump when we got closer to 1,600 from the original approx. 1,200 square feet.

Genny Li · Answer

An extra half bath on a townhome is worth $150-200/mo in my market. Ya gotta know what it goes for there, really.

Adding Square Footage - Worth It?

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