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!