$200K - home addition or pay home loan?

[Account Closed]

We have the ability to pay $200K on our existing loan which is at 4%.

Instead I am wondering if I should invest in an addition (approx 600 sq feet), 1 master bedroom, 1 bath & space for office. Current home is ranch style, 2200 sq feet and we have the lot size to support this addition.

The addition will give us the ability to rent out a portion of the house (2 bedrooms + 1 bath) which could be rented for approx $2000 per month+utilities. This will not interfere with the main portion of the house.

The addition will also increase the property value by approx $500 per square feet.

$200K will not buy us another house in Bay Area, I am reluctant to go out of state and I don't want to invest in the stock market. So I think addition makes sense to me however not sure if I am missing anything?

[Chris Mason]

Originally posted by @Account Closed:

We have the ability to pay $200K on our existing loan which is at 4%.

Instead I am wondering if I should invest in an addition (approx 600 sq feet), 1 master bedroom, 1 bath & space for office. Current home is ranch style, 2200 sq feet and we have the lot size to support this addition.

The addition will give us the ability to rent out a portion of the house (2 bedrooms + 1 bath) which could be rented for approx $2000 per month+utilities. This will not interfere with the main portion of the house.

The addition will also increase the property value by approx $500 per square feet.

$200K will not buy us another house in Bay Area, I am reluctant to go out of state and I don't want to invest in the stock market. So I think addition makes sense to me however not sure if I am missing anything?

Paying off $200k will only have a 4% ROI, as others have said.

Building the addition will probably not add $200k in value to the home when it goes to sell. Less. GCs are too expensive in our area.

However, you will get that rental income. If you plan to hold onto it long-term, that could make sense. 

$200k is also 25% down on a 2-4 unit property, after closing costs just under $800k.