What is the Return on Investment of a Home Addition?
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. At Lamont Bros., we use a proprietary Remodel Investment Calculator designed specifically for home improvement projects.
Using our 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.
Want to Learn More About Home Remodeling?
Now that you understand how to maximize the return on investment for your next home addition, take the next step in your research. Download our free guide, “6 Steps to a Successful Remodel,” where we discuss a clear, easy-to-follow process that will help you have a great remodeling experience.
Think it’s time to start the ball rolling for your home addition? If so, don’t do it alone! Click the button below to schedule a free design consultation with a member of our team. We’ll help you value engineer your home addition to ensure it’s an investment that serves you well for years to come.