Homeowners often grapple with the decision to expand or modify their homes. The uncertainties lie not just in the construction itself, but in the assurance that their investment will add tangible value to their property. Indeed, the question at the forefront of many homeowners’ minds is: Will this home addition deliver a return on investment that makes the time, effort, and money worthwhile?
At Lamont Bros. Design & Construction, our history of designing and building home additions extends over many years and dozens of successful projects. In our experience, it takes meticulous planning, understanding of market dynamics, and quality execution to produce a home addition that generates a positive return on investment.
In this article, we’ll address the central concerns tied to home additions. This includes factors that influence the value of your home addition, strategies to predict the approximate ROI, and effective methods to enhance that return. By the end of this read, you’ll be equipped with the knowledge to make informed decisions regarding your home addition. The subjects we’ll cover include:
- How is a Home Addition an Investment?
- Predicting Your Home Addition’s ROI
- Best Practices to Optimize Your Addition’s ROI
Is a Home Addition a Good Investment?
When done correctly, home remodeling can be a great investment in the value of your home. The key is ensuring that you do it the right way and give the investment time to mature. Here are a few ways that a home addition can serve as an investment.
A Home Addition Grows in Value Over Time
Just as interest compounds in an investment account, the value of a home addition can compound as home prices in the area rise.
According to Remodel Magazine’s annual Cost vs. Value Report, a home addition can add between 50-60% of its total cost back in value to the home. So, a $300,000 addition can immediately increase the value of the home by $180,000.
However, if your home’s value increases by 7% annually, the value of your addition will also hypothetically grows by that rate. Over several years, this compounding effect can result in significant gains on your initial investment. After 8 years, the addition will have grown in value enough to pay for itself. After 12 years, it will have profited over $100,000 beyond its initial cost.
A Home Addition Can Help You Keep a Low Mortgage Rate
Opting for a home addition can preserve your favorable mortgage rate, especially during times of interest hikes.
If you’re unhappy with your current home but currently have a low mortgage rate, moving to a home of the exact same value might mean sacrificing your current interest rate and paying a higher monthly payment.
Alternatively, for the same monthly increase, you can take out a home equity loan to build an addition to your current home. This allows you to leverage your equity in a way that increases your home’s value and customizes it to your liking.
A Home Addition is an Investment In Your Quality of Life
Homeowners often focus on the financial aspects of a home addition, but overlook its primary objective. An addition’s primary purpose is enhancing the experience of living in your home. While a home addition can be a sound financial move, its core value lies in its long-term benefits to your daily life.
Consider the fact that the average American homeowner stays in their home for 13 years. It’s logical to invest in a home addition that elevates the living experience during that time. Whether it’s expanding space for a growing family or creating more room for an elderly relative, additions are about optimizing the home for your needs.
How to Determine the ROI of Your Home Addition
If you want a deeper of the value your planned addition will bring to your home, here are a few steps you can take. Keep in mind that this process is merely a method of prediction and actual results may vary depending on market conditions.
Step 1. Get An Accurate Cost Estimate for Your Addition
Before you can determine the potential return on your investment, you need to know how much you’re going to invest in a home addition. The challenge here is finding a contractor who can accurately estimate the cost of the project.
Not every contractor’s initial bids are accurate representations of what a home addition will actually cost. To ensure that the number you end up with is one you can trust, get a cost estimate from a contractor who uses an established budgeting system and can reference costs from previous projects similar to yours.
Step 2. Gather Home Value Data For Your Area
Once you have a budget range for your home addition project, you’ll want to estimate how much value the addition will bring to your home.
The best way to do this is to enter your city or neighborhood into the Market Data Overview search bar at Realtor.com. Here, you can see the median listing price per square foot for homes in your neighborhood.
Let’s say you’re planning to do a 400-square-foot addition to your home in Lake Oswego for $300,000. As of August 2023, the median home price per square foot in Lake Oswego is $439. That means you’ll immediately recoup $175,000, or 58% of the total remodel cost.
Now, you know how much your home has to grow in value in order to break even.
Step 3. Use an Investment Calculator to Determine Growth Over Time
An investment calculator can show you how much an investment will grow in value over a period of time. Using a investment calculator, you can calculate how long it would take for your home to grow in value enough to recover the cost of your addition. You can also use it to compare how much it would be worth with and without a home addition after several years. This way, you can decide if the investment will have enough time to mature before you want to sell the home.
Practical Ways to Maximize The Return on Investment of Your Home Addition
Leveraging the insights from industry professionals, here are some tailored recommendations to ensure you get the best ROI for your home addition.
Design with Simplicity for Space Efficiency:
Often, the best return on investment comes from straightforward designs that optimize the space of your home addition. This doesn’t necessarily mean you should sacrifice quality or aesthetics. Instead, it suggests maximizing the square footage you can get for every dollar spent.
The more space you add without unnecessarily increasing costs, the better the potential ROI. So, consider designs that are efficient, functional, and fit seamlessly with the existing structure.
Address Missing Home Features:
Beyond just adding space, think about the current features (or lack thereof) in your home. If your home lacks something crucial that is standard in most homes in your area, it could deter potential buyers or reduce the home’s value.
By addressing these missing features with your addition, you’re not just increasing the size of your home; you’re significantly improving its functionality and appeal. For example, transforming a one-bathroom home into a two-bathroom one can substantially boost its market value.
Mind Your Holding Period and Financial Leverage:
Real estate, like many other investments, often requires an extended holding period to realize significant returns. While holding onto a property for 5-7 years may recoup your initial costs of constructing the addition, you’ll see the project pay for itself multiple times over if you hold the property for several decades.
Also, consider the financing methods you use. The amount you decide to borrow and the interest rates attached can significantly impact your returns. In an environment where home prices are rising, even a high interest rate mortgage might be worth the money if the asset’s appreciation outpaces the interest cost.
However, always ensure you’re making informed decisions based on current market trends and future predictions. If you’re leveraging a significant amount of money, ensure the real estate market’s potential growth justifies the interest costs.
Frequently Asked Questions
Do additions add value to a home?
Yes, a well-designed and permitted addition can increase a home’s value by adding usable space, improving the layout, or providing a feature buyers want. However, the increase in market value may not equal the cost of construction. Location, addition type, design quality, and comparable homes in the area all affect the return.
Does adding square footage automatically increase a home’s appraised value?
Not automatically. Appraisers consider finished area, room count, construction quality, condition, and comparable sales. They do not simply multiply the new square footage by the neighborhood’s average price per square foot. Fannie Mae requires appraisal adjustments to reflect actual market reactions rather than a standard price-per-square-foot formula. Fannie Mae
Which type of home addition adds the most value?
There is no single addition that produces the best return in every market. Bedrooms, bathrooms, kitchen expansions, primary suites, and flexible living spaces may add value when they address a feature the home currently lacks. The strongest choice is usually one supported by local buyer demand and designed to fit naturally with the existing house. See examples in the Lamont Bros. addition portfolio.
Does an unpermitted addition add value?
An unpermitted addition can create complications during an appraisal, inspection, financing, or sale. Freddie Mac requires appraisers to comment on additions or alterations completed without required permits. The effect on value depends on the work, local requirements, and whether the addition can be approved after construction. Freddie Mac
Is it financially better to build an addition or move?
The answer depends on the cost of the addition, available home equity, current mortgage terms, local home prices, selling expenses, and the cost of modifying another house. Moving may provide more space without construction, while an addition allows you to remain in a home and neighborhood that already suit you. Compare the complete cost of both options rather than construction cost alone.
How long should you stay in a home after building an addition?
There is no guaranteed break-even period. Future appreciation, financing costs, market conditions, and the eventual sale price cannot be predicted with certainty. The longer you use the addition, the more daily value you receive from it, but that does not guarantee a specific financial return. Homeowners expecting to sell soon should give local resale evidence greater weight before committing to a major addition.
Planning a Home Addition?
A home addition should do more than increase square footage. It should solve a real need, improve how the existing home works, and justify the investment required to build it. Lamont Bros. Design & Construction evaluates the property, existing structure, layout, and budget before major design decisions become construction commitments.
Learn more about our home addition services, review completed projects in our addition portfolio, or read about the Lamont Bros. design-build process.
Ready to determine what type of addition fits your home? Contact Lamont Bros. to schedule a consultation.
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