Do home additions add value?

Home additions have the potential to add to the value of your property — but they may cost a lot of money to complete as well.

Adding on to your existing home — creating a new bedroom suite, adding a bathroom or even building a second story — can be a good way to make your house suit your needs. It can also potentially increase your home’s value.

The reason is simple: Most methods of estimating a home’s value consider the square footage, so adding additional living space may increase your its worth. But these projects can be expensive.

We’ll review the potential cost of different types of home addition projects, the return they may bring and how to pay for it all.

• Do home additions add value?
• Is a home addition worth it?
• How can I pay for home additions?
• Estimating the cost of a home addition

Do home additions add value?

The short answer is yes — home additions typically add value to your home. However, you must also keep the cost in mind.

The Remodeling 2023 Cost vs. Value report, which ranks the top 22 home improvement projects based on average return on investment, provides some insight into what types of additions can be most financially worthwhile. Keep in mind that returns aren’t guaranteed and that they may vary based on where you live and local market conditions.

For instance …

• A midrange primary suite addition has an average cost of nearly $157,855, with an average return of about 30%. This estimate assumes that you’re adding a standard 24-by-16 bedroom suite with carpet in the bedroom, tile in the bathroom, and a separate shower and soaker tub.
• A midrange bathroom addition that’s 6 feet by 8 feet costs an average of about $57,090, with an expected return of about 30%.
• A wood deck addition costs an average of nearly $17,051, with a return of about 50%.

You may also choose to extend existing rooms rather than build completely new ones. Extending a room typically costs between $600 and $750 per square foot, according to HomeAdvisor, so a standard 12-by-6 extension would run between $43,200 and $54,000. HomeAdvisor does not estimate how much these additions add to the property’s value.

Is a home addition worth it?

Deciding whether an addition is worth it is not a simple process. The answer depends on your family’s needs, financing, and how long you plan to spend in the home.

Cost versus return on investment

The 2023 Cost vs. Value report ranks remodeling projects according to their return on investment. In the most recent report, most percentages are all less than 100 — meaning you’re unlikely to recoup the entire cost of the project in your home’s value, and you’re unlikely to see a full return on your investment in that particular project when you sell the home.  

But some home renovations may offer more bang for your buck. A wooden deck adds nearly 50% of the cost in potential home resale value. An upscale bedroom suite is at the bottom of the list, with the increased value being approximately 23% of the cost of the project.

Can you improve your home too much?

You should consider the typical home in your neighborhood before embarking on an addition. It’s possible to “over improve” a home, meaning your upgrades are larger or costlier than what’s typical for a home in your area.

A 4,000-square-foot house in an area with primarily 2,000-square-foot homes may be considered over-improved. The same goes for a home where you add an in-ground pool, if having a pool is unusual for the neighborhood.

In these cases, you likely won’t get the full benefit to your home value, giving you an even lower return on your investment. An over-improved property may also be more difficult to sell. You may have fewer potential buyers in your local market.

Will a home addition raise your property taxes?

A home addition project has the potential to increase your property tax bill. Additions that add square footage to the home or luxury upgrades like a spa or pool can add to the value of your home as assessed by your local government.

Property assessments are typically based on property values, and the higher the value, the higher the taxes. Local governments often pay attention to building permits and may reassess your home based on the improvements after they are completed.

How can I pay for home additions?

Paying cash is the cheapest way to pay for home improvements. But with the price tag of many home additions, paying cash may be out of reach. Here are a few other options you may have for paying for your home addition.

Home equity loan

If you have lived in your home for a while, you may have built up equity in your property. Equity is the difference between what you owe on your mortgage and what the home is worth, and home equity loans allow you to borrow against this value. Home equity loans are generally disbursed as a lump sum and repaid at a fixed interest rate.

HELOC

Home equity lines of credit, often referred to as HELOCs, work like a credit card: When you take out a HELOC, you have a set limit for how much you can borrow and can draw on the account over time.

During the “draw period,” you are usually only responsible for paying interest, typically at a variable rate. When the draw period ends, you’ll begin repaying all that you borrowed — principal and interest.

Both a home equity loan and a home equity line of credit use your home as collateral, meaning you can lose your home to foreclosure if you are unable to make your payments.

Cash-out refinance

A cash-out refinance is another way to tap your home equity. With this financing option, you take out a new mortgage loan for a higher amount than what you currently owe. Your old mortgage is paid off and replaced by the new one.

The difference in the two loan amounts comes to you as cash, minus any fees or other costs you agree to pay from the loan proceeds.

Credit card

For smaller projects, credit cards may be a good way to spread out your payments. However, credit cards typically have high interest rates that add to the total amount you must pay back.

You may be offered a credit card with a deferred interest rate for a period of time. This interest rate generally resets to a higher rate after the introductory period. If you haven’t paid back your balance, you may owe back interest that can lead to high monthly payments.

Personal loan

Personal loans can be an alternative to credit cards for financing a home improvement project. These loans are usually paid back at a fixed rate, meaning your monthly payment will not change. The loans are also usually unsecured, so homeowners don’t risk losing their home if they fail to make their payments. Your credit and income are typically used to determine how much you can borrow and what interest rate you are offered.

Estimating the cost of a home addition

The cost of a home addition can vary by location, and sites like HomeAdvisor and Houzz can give you a price range you can expect to pay in your area. This may help you decide whether your project is a good idea for you.

A good way to estimate your home addition’s cost is to get quotes from contractors in your area. Contact multiple contractors and ask for a written estimate. Make sure the estimate includes a full description of the work to be completed and the materials to be used along with the price. The lowest bid is not always the best one.

To find contractors, you can talk to friends and neighbors who have done similar projects. You may also try sites like Angi to help find contractors who might be a good fit.

© 2023 Zonda Media, a Delaware Corporation. Complete data from the Remodeling 2021 Cost vs. Value Report can be downloaded free at www.costvsvalue.com.