You love your home. It’s where you spend most of your time. And that’s especially been true during these last few years. But as much as you love your home, you likely daydream about what life would be like if you had some extra space; How you would enjoy a larger kitchen, an open concept space big enough to entertain, a bigger bedroom with an ensuite bathroom, and walk-in closet, or a private office all to yourself, where you can work from home with the quiet you need to concentrate.
An addition means you’re adding extra square footage to your home. Essentially, you’re expanding your home, either upwards or outwards. And there are countless reasons why you’d want to invest in a home addition over any other kind of renovation.
Some of the more popular reasons why you’d like to add square footage to your home are:
- You’re spending more of your spare time at home
- Your family is growing in size
- You’ve begun working from home
- You have in-laws that are going to move in permanently
- You’d like to have a semi-detached rental unit as an income-generating property
- You’ve outgrown your home, and you just want more space
Two of the best reasons to consider investing in a home addition are:
1- It’s entirely your creation. Building an addition is like designing a whole new house without the expense of a whole new house. Few renovation projects are as thrilling and creatively satisfying as working with the blank slate that a home addition offers.
2- A home addition has the potential to provide you with the best return-on-investment (ROI) than any other home renovation. This is because adding extra square footage to your home typically adds more value than room renovations. Understandably then, additions are usually much more costly than renovations.
Best Bang for Your Buck: Home Addition vs. Home Renovation
During the height of the pandemic, the majority of people who renovated their homes did it to improve their living situation, superseding financial gain as the previous driving factor. However, according to a survey conducted on behalf of RE/MAX Canada, despite the trend of home renovations done for personal use and enjoyment, 59% of Canadians still considered what their return on investment would be.
In short, both enjoyment and resale value matter.
A home addition adds livable square footage to your home and is usable all year round (a porch doesn’t count). Additions usually increase the value of your home more than renovations, because you are physically making your house bigger, and everyone likes more space
A renovation refers to updating or repairing an already-existing space and does not add square footage to your home. Turning your unfinished basement into an entertainment room or building an outdoor deck are both considered renovations. They’ll likely also increase the value of your home, but at a lesser amount than an addition.
So why does adding more square footage to your home increase its value more than renovating an existing space?
Adding square footage is adding actual livable space. And adding more livable space will always be more valuable than simply changing the look of a room. While both an addition and a renovation will make your home more appealing, and both will increase its functionality, only one actually makes your home bigger. And more space equals higher resale value.
Renovating Your Basement vs. Adding a Room Above Your Garage
You’re trying to add more livable space to your house AND increase its value. So, which renovation holds the biggest bang for your buck? Let’s look at an example.
Renovating an unfinished basement is a popular option. The space is already there, it’s just a matter of making it a functional, fun, and cozy place to hang out. But renovating a basement does not add square footage to your home.
So, if you’re looking to increase the resale value of your home at the same time as adding more livable space, building an additional room above the garage is worth some serious thought. It may be a more expensive investment, but it will add additional square footage to your home and will increase your home’s value significantly more than renovating the basement.
7 Popular Home Additions
- Expanding an existing room (ie: kitchen, dining room or family room)
- Bump-outs to existing rooms (ie: adding a walk-in closet to a bedroom, adding a mudroom to a front entry, adding a pantry to a kitchen, adding a fireplace or bay window to a living room)
- A 4-seasons sunroom
- An extra room above the garage (ie: guest bedroom, playroom, office)
- A full second story
- An in-law suite or rental unit complete with bedroom, bathroom, kitchenette, living room, and laundry
Important Considerations
Properly Prepare for the Construction Process
The first few days of construction can be thrilling. At first, you can barely wait for the workers to show up. They cannot seem to arrive soon enough.
Then one Saturday, two weeks into the project, you’ve been woken up abruptly to the roar of a gas generator five feet from your bedroom window, and you suddenly realize that your romance with the building of your new en-suite has come to an end.
Worse than that, your relationship with your spouse or partner may have gotten a bit rocky. Any number of things could have added to this stress on your relationship: having work crews in your house six days a week; noise and dust; constantly dealing with the contractor rather than with each other; lack of privacy; and the ultimate relationship stressor… money worries.
My best advice, consider living somewhere else during the construction phase.
Really understand what you hope to achieve with your addition
More space, more privacy, more functionality, more uniqueness, higher resale value, etc etc etc.
Dig deep with your reasons for investing in a home addition, and make sure to communicate this with everyone involved in the project: spouse, other family members, contractors, appraiser, neighbours, etc. Communicating your intentions and expectations with everyone that is involved or may be affected by the process is critical to avoiding misunderstandings once construction has begun.
Get your home appraised before and after the home addition
If you decide to go ahead with a major home addition, like an extra room, a complete stand-alone suite, or an entire second floor, consider having your home appraised before and after the addition. You’ll undoubtedly find it helpful to know what kind of value the addition has added to your house.
The Increased Resale Value Offered by a Home Addition
According to certain popular homeowners associations, an average of 65% of the cost of a mid-range two-story addition may be recovered at the time of sale. But there is no way of predicting the real estate market years in advance. Could be more, could be less.
Resale value aside, it will always be cheaper to build an addition than to buy or build a new home that equals the space of your existing house plus an addition. And at the very least, the closing costs involved with selling your old house and buying the new house make a home addition a more financially viable option.
Even though additions offer the potential for higher cost-value ratios than other renovation projects, you still may not recover the full cost of the addition when you sell. That being said, it’s a gamble that many homeowners make, because home additions get to be enjoyed by your and your family for the years that you do live in your house, and there is always the potential for a good ROI once you’re ready to sell.
Building an addition with the full knowledge that you will sell the home within a year or two usually means losing money, so home additions are most valuable if you and your family are able to make the most out of your addition before you decide to sell.
Advice From A Rockstar Mortgage Broker
“It’s actually cheaper to get what you want right where you are.” Re-financing to pay for the exact home addition you want will ALWAYS be cheaper than moving. That’s because adding extra square footage adds huge value at a much lesser cost than moving. “Adding 600sq ft adds huge value and is far less expensive than moving.”
“It’s worth every dollar you spend.” Every dollar you spend on a home addition will give your house more value than any other renovation. “Not everyone wants a pool, but everyone wants more space.” That being said, home additions must always come from the passion of living in the space. It’s rare for someone to invest in a home addition strictly for resale value. Especially since the future resale value can never be 100% guaranteed.
In order to cough up the dough for your addition (they’re usually pretty expensive), working with a mortgage broker to refinance your mortgage is the best way to get the money you need with the best terms. A mortgage broker will work with an appraiser to determine the value of your home before and after the addition. Once your mortgage broker knows how much your home will be worth after the addition is done, she will use that knowledge to get you the best mortgage solution she can.
“Mortgage debt is still great debt to have. This is still a great way to build real estate wealth.”
— Linda Walters, Mortgage Broker with Mortgage Architects, www.yourmortgagegps.com
Resale Value After a Home Addition: A Short Case Study
A family in Oakville recently invested in a substantial home addition and has shared their experience with us.
Why did you want an addition?
We had a tight kitchen space that could not be properly renovated to install new cabinets. So we decided to go ahead with an addition so that we could make a spacious kitchen by using a dead-end unuseful space in the backyard, and at the same time change the ground floor into an open space concept and upgrade the finishes.
Why didn’t you choose an alternative (renovating unused space and/or buying a new home that already had the space you needed)?
Firstly, there was not much unused space inside our house. It’s a small house. And we love the neighborhood. And there was no chance of finding a nice house in the same neighborhood within our budget. And with all the costs associated with selling/buying a house, it would have been so much more expensive. And even if we had been able to find a house, we would still have needed to do some interior renovations to upgrade the finishes to our liking.
What year did you do the addition and what was the pre-addition value of your home?
We applied for the permit in Summer 2020, but due to the lengthy process of obtaining the permit, the construction started in the Summer and Fall of 2021. The value of our house before construction was about $900K-$1M.
How much did your addition cost?
Just over $350K.
What is the post-addition value of your home?
We have not looked at the market value as we have no intention to sell, but based on the bank’s appraisal the value is now around $1.3M-$1.4M.
Key Takeaways
- Home additions are usually more costly than renovations, but they can significantly increase the value of your home more than a renovation.
- There are all kinds of additions that add extra space (square footage) to your home: big and small.
- The construction process that comes with a large-scale home addition is very invasive to your personal living space, so consider living somewhere else during the construction phase.
- If your home addition is a huge investment, have your house appraised before and after to get a sense of the increase in value.
- Mortgage debt is still a good kind of debt, so consider refinancing your home to pay for your addition.
- Don’t invest in a home addition just because of the potential resale value. You want the addition to be a space you and your family will get to enjoy as well.
