When to add a new floor?

Question

Most flipping advice and examples I read about or listen to on Bigger Pockets focuses on squeezing in rooms, or creating duplexes, pushing out a spaces, opening up spaces and functional or material upgrades...but when does it make economic sense to rip off the roof and add a new floor, with stairs (obviously) and expanding HVAC, plumbing, etc?

Randall Alan · Answer

@Kyle McAdams

I probably have less of an answer for you and more of a suggestion.  From an experience perspective we’ve done 6 flips, and own 37 rentals - so take that for what it’s worth….

Our approach has always been to do the minimum amount of work to maximize our return.  As soon as you say “remove the roof”, it necessarily means having to put one back on.  It’s the most expensive part of capital expenses you run into.  Then it’s not just the roof, it’s every system… extend the plumbing, put in a new AC for the increased space, run new electrical,  and so on down the line.  Then there is the thought of the engineering it takes to support a 2nd floor.  It takes floor trusses that aren’t in your one story house.  And, as is the case with anything like what you are talking about, trying to adapt something old to a new purpose is likely more expensive than building it from scratch in the first place.

In my opinion it’s almost always going to be more cost efficient to start with a (different) 2 story building than to try and adapt an existing one story structure to be 2 story.  The only time I might think that would be different would be based on an exclusive location where being in that ‘exact spot’ somehow provides an oversized return (think 5th Avenue in NYC), or some tourist / resort location where the location demands way above average rent.  Or when there is literally no other available spot to build on.  Then, maybe, I could see the extra expense somehow being justified.  But otherwise it’s just way easier to find the 2 story that is already there than to try and invent it out of a 1 story house.  It might even make more sense to tear down the 1 story to build a new 2 story if I had to guess!

The kicker is this:  any existing 2 story house requires no additional investment.  You are necessarily going to pay above market per square foot to try to add square footage to a 1 story building that isn’t designed for a 2nd story.  At that point, most likely your house just went upside down in value versus cost if you are talking about paying an average price for it up front in the first place.   If the house was free to you (like inherited) maybe something like that could make sense, but in the regular world (outside of those location specific places above) I wouldn’t think it would hardly ever make sense.

My suffix is that I have never done it, just applying the basics of math, finances,  and building knowledge to offer the suggestion.

all the best!Randy

Tj Floros · Answer

I know of some people who have done this here in Chicago, and I think a big factor outside of price, ARV, etc was zoning, depending if you can do it out right or if you are in an ADU zone. I would personally think thats half the battle getting the approval to actually do that because you will definitely need to pull permits on a project like this.

Jules Aton · Answer

Doh an actual floor, like another level.

Kyle McAdams · Answer

Thanks, TJ and JD, much appreciated.

JD Martin · Answer

This will almost never make sense unless you have a large enough footprint on very valuable land for the return. Assuming the foundation and lower floors are already in condition to handle the extra load - and that's a big assumption - you will essentially have to empty the building and plan for the possibility of redoing a lot of finished surfaces if your contractor cannot keep the weather off the building, which is only going to be done with massive tarps/tenting that can shed water, that also has enough clearance to do construction work.

Once you've put a lid on a building and added finishes inside you're essentially locked into whatever you've designed. If you were in a tight urban area, with super-high rents possible for rehabbing & adding living units, you might get a good return (or more likely, sell for a higher return) but you need a lot of things to line up at the same time.

Jules Aton · Answer

Unless wood or laminate when purchased I immediately replace floors with one of the two prior to renting. Most other stuff unless a safety hazard I hold off on replacing until it breaks.

Kyle McAdams · Answer

Thanks Randall. Great background insight.

When to add a new floor?

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