Home addition vs selling/moving.

[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!

[Andy Sabisch]

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