Reader Case Study - Build an addition?

[sangfroid]

We are a married couple filing jointly, mid 40s, zero dependents. Live in a inner NE Portland, OR single-family-housing neighborhood.

We currently live in a very small (700 sqft) house. With the COVIDs, we are WFH, and we have decided H is too small. We are either going to build an addition, or move. I am wondering what MMM community thinks of the economics of our addition.

I have built up a spreadsheet to calculate the "real expected cost" of living in various homes. Our current home (headed "current"), our addition ("addition"), and a few other homes. I am not very confident in my calculations. Basically, I added up the yearly costs of living in the home. I included utilities, opportunity cost of equity, expected future revenue from home appreciation, and the cost of selling the home after ten years (by which time we hope to be retired, and move out of the city.) I modeled the cost of selling as the sum of realtor fees, paying ourselves back for our down payment, paying the mortgage off, less the sale value of the home.

For some of the homes I have specifically entered our principal outstanding, since we have an actual mortgage on our current home and a rental home in Helena. The others assume a 20% down payment.

Summarizing, I think the addition will cost about $220k +/-$20k, and add about $150k-$250k in value to the house. We estimate the cost of moving at about $50k, of which $20k are realtor fees, $10k is anticipated inefficiency (e.g. overlapping mortgages, or temporary housing costs) and $20k is lost wages due to disruption. (E.g. if we spend 150 hours packing and moving, that is time we could have spent either working or otherwise living our lives.)

Does my spreadsheet look basically OK? (https://docs.google.com/spreadsheets/d/1_kYzfHcS_PRk40_cZH7f9c48_u1cP8WaiAWAVSGaaGw/edit?usp=sharing, screenshot attached). If it looks OK, what do you think could be modeled better?

If you think the spreadsheet is basically accurate, do you think we should build the addition, or move?

I'm a little worried my post may not be up to par, so feedback welcome there too.

[slugsworth]

There area few things I don't understand, one that stands out is:

paying ourselves back for our down payment

All of the proceeds from the sale of your house are yours.  There is no 'down payment' bucket vs appreciation bucket.

Maybe I'm missing something or our brains just work differently, but I would approach this differently and a bit more simply.

Option 1)
Cost of addition is X (which you say is about $220k right now)

Option 2)
Cost of selling your house is about 8% for the transaction costs (Adjust to your better estimate; realtor fees, taxes, etc)+ lost wages; Plus the closing costs of buying a new place + the moving expenses including lost work

I could be wrong, but I am assuming that the utility costs are going to be similar for similar sized homes, so that shouldn't be a variable in your spreadsheet.

My analysis would basically compare the cost of option 1 and option 2 now.  I would weigh this pretty heavily since it is your cost basis, and a sure thing.

Since you think that the homes will appreciate at 2%, your opportunity cost is 5%, and mortgage rates are ~3.65% it seems mathematically that whichever option is least expensive now, will result in the most money later, so you can skip looking at that.

Once you know the math I would think through the hassle factor of a renovation vs the hassle factor of selling and buying a house.

[zolotiyeruki]

I'm a "find the root cause" kind of person. Because often, we go chasing solutions without sufficiently defining the problem, and so we can lock ourselves into a "solution" that, while conventional, may not be the best way of addressing the issue.

When you say "H is too small," can you define that a bit more?  Is it hard to be around each other all day, every day?  Is it the need for separate workspaces?  Is it a need for more storage?  Just because Bigger House would resolve these issues doesn't mean that Bigger House is the best solution.

For example, could you build a finished "shed" (with electricity, air conditioning, etc) in the back yard to provide the extra space? (or buy a pre-built one, and modify as needed, to save time?)  Because that could be a lot less expensive than an addition or moving.  Or, since your WFH situation may be temporary (not clear), could you buy a used RV or travel trailer to use for extra space for now?  Or, is there some place you could go outside the home to work?

[sangfroid]

My analysis would basically compare the cost of option 1 and option 2 now.  I would weigh this pretty heavily since it is your cost basis, and a sure thing.

Since you think that the homes will appreciate at 2%, your opportunity cost is 5%, and mortgage rates are ~3.65% it seems mathematically that whichever option is least expensive now, will result in the most money later, so you can skip looking at that.

I like this way of looking at it, but, and maybe I am missing something, I don't see an accounting for the ongoing cost of living in one home vs another. E.g. the Irvington house will cost us $2k/mo, versus the addition at $1.5k/mo, so if we live in the house for ten years, then we'll be ahead $60k in the cheaper home.

[affordablehousing]

Just buy a new house. We're in the middle of an addition and I so wish we'd just moved. SO MUCH EASIER!

[Papa bear]

Money aside.  Do you like your location where you live?  Can you see yourself in that neighborhood for years to come?  Can you buy in a similar area? 

If you like your location and can’t easily replicate it, then put on the addition. Contrary to other posters, it’s not the end of the world.  Hell, I’m basically constantly in some sort of remodel, currently working on something myself. 

If you find a better location, then go move!


Sent from my iPhone using Tapatalk

[sangfroid]

When you say "H is too small," can you define that a bit more?

Well, a 700 sqft house is fairly cozy. We have a bedroom, which has about 20 sqft of walkable floor space, just enough. A nook with my desk, a kitchen, and dining room table, with barely navigable walking space. A bathroom, and a second bedroom, about 8x15, with the wife's desk, a couch, and TV. I have installed shelves just about everywhere possible, including an additional full width kitchen cabinet (but only half depth) and we still have to keep our "pantry" type food in bins in the basement.

For example, could you build a finished "shed" (with electricity, air conditioning, etc) in the back yard to provide the extra space? (or buy a pre-built one, and modify as needed, to save time?)  Because that could be a lot less expensive than an addition or moving.  Or, since your WFH situation may be temporary (not clear), could you buy a used RV or travel trailer to use for extra space for now?  Or, is there some place you could go outside the home to work?

We do have a backyard, and we have considered building in it. Doing so would involve some sacrifice, cutting down shade trees, losing the picnic table, or giving up most of the lawn. Setbacks mean placement of a shed is sort of awkward.

At the end of the day, building in the back yard or not seems like a value judgement. How much do you enjoy the space as it is? How much would you enjoy the savings of foregoing the addition? For us, we love the back yard as it is, it is one of the best parts of this home. Building back there would also incur a substantial loss of enjoyment, so we are not planning on building back there.

[meandmyfamily]

You have a basement?  Can you put an office down there?

[sangfroid]

You have a basement?  Can you put an office down there?

Heh, yep. We've thought about it. I lived in a basement apartment during college. And I had a basement office once at a summer job. Have you ever spent time in a basement? We're not against doing work to the basement, it is usually a good ROI, but I would rather move than spend time in one.

[BDWW]

You have a basement?  Can you put an office down there?

Heh, yep. We've thought about it. I lived in a basement apartment during college. And I had a basement office once at a summer job. Have you ever spent time in a basement? We're not against doing work to the basement, it is usually a good ROI, but I would rather move than spend time in one.

Just curious, what's wrong with basements? Properly conditioned and finished they're no different than anywhere else to me. Lack of natural light?

[sangfroid]

Just curious, what's wrong with basements? Properly conditioned and finished they're no different than anywhere else to me. Lack of natural light?

Lack of natural light, sure.

There is also the inescapable feeling of entrapment in low value space. Basically, no matter how nice it is, it is always a dungeon. It's sort of a self-fulfilling prophecy, I guess. I doubt everyone shares my feelings.

[bacchi]

Just curious, what's wrong with basements? Properly conditioned and finished they're no different than anywhere else to me. Lack of natural light?

Lack of natural light, sure.

There is also the inescapable feeling of entrapment in low value space. Basically, no matter how nice it is, it is always a dungeon.

Low value or low head space?

It's sort of a self-fulfilling prophecy, I guess. I doubt everyone shares my feelings.

Yeah, I like basements. I don't have one now and regret not adding one to the house when we built.

[elaine amj]

I like basements just fine too :)

Maybe if you accept that your basement is your store room? I have a decent sized kitchen with lots of storage and still use my basement pantry for dry goods. 

It sounds like you have your bedroom, two separate workspaces for separation from each other and a cooking/living space. Do you feel a strong need for a larger living area? Is there any way to reconfigure your current living/dining/kitchen?

I have been renting a tiny 700 sq ft 3 bedroom cottage for various weeks this summer and been super surprised how functional the open concept kitchen/living/dining space is.

That said, I get ya. I have a smallish house and really don't like the layout of my main floor and would move in a heartbeat if I found something in an equal (preferably less) price range. I entertain a lot and my main floor is not conducive. An addition is way more than I want to spend on housing.

Sent from my VCE-AL00 using Tapatalk

[slappy]

Is this a permanent solution to a temporary problem? Could you maybe find a coworking space locally that you could rent for awhile?

[slugsworth]

I like this way of looking at it, but, and maybe I am missing something, I don't see an accounting for the ongoing cost of living in one home vs another. E.g. the Irvington house will cost us $2k/mo, versus the addition at $1.5k/mo, so if we live in the house for ten years, then we'll be ahead $60k in the cheaper home.

If there is a monthly savings,  you can figure that in, but I would be hesitant to factor in a savings on property taxes or utilities or maintenance for similar sized homes, so where is it coming from?

[ysette9]

I don’t think the timelines make sense for what you are proposing. You need more room to work at home Right Now. An addition is a solution that is probably a year out, once you factor in permitting, delays, labor shortage because everyone wants an addition right now, and so forth. I have never seen a home remodel project that wasn’t significantly delayed.

Why not rent your house for a year and rent a bigger place for you? Chances are you won’t still be working from home a hear from now, or at least not to the same extent.

[soccerluvof4]

I am /must be missing something because i dont see anyhow to Justify a 220k addition to a 700 Sq foot house. I would move and and see if for less than the addition you can get what you need.

[slugsworth]

I am /must be missing something because i dont see anyhow to Justify a 220k addition to a 700 Sq foot house. I would move and and see if for less than the addition you can get what you need.

Per Redfin, the median home price in PDX is $485k, so $220k on an addition is substantial, but not something out of line. The midwest is looking better all the time!     

[fuzzy math]

I don’t think the timelines make sense for what you are proposing. You need more room to work at home Right Now. An addition is a solution that is probably a year out, once you factor in permitting, delays, labor shortage because everyone wants an addition right now, and so forth. I have never seen a home remodel project that wasn’t significantly delayed.

Why not rent your house for a year and rent a bigger place for you? Chances are you won’t still be working from home a hear from now, or at least not to the same extent.

And the noise!!! How is OP supposed to be able to work at home with all the noise and intrusions into your space if you can't handle working at home with a spouse who is safely shut in a different bedroom with the door closed?

[TomTX]

For example, could you build a finished "shed" (with electricity, air conditioning, etc) in the back yard to provide the extra space? (or buy a pre-built one, and modify as needed, to save time?)  Because that could be a lot less expensive than an addition or moving.  Or, since your WFH situation may be temporary (not clear), could you buy a used RV or travel trailer to use for extra space for now?  Or, is there some place you could go outside the home to work?

We do have a backyard, and we have considered building in it. Doing so would involve some sacrifice, cutting down shade trees, losing the picnic table, or giving up most of the lawn. Setbacks mean placement of a shed is sort of awkward.

Wouldn't the addition take an equivalent amount of space in the backyard, while costing maybe $50k for a finished (power/ac/insulated) shed?

You could even have the shed immediately adjacent to the house on the same footprint, minus a few inches of gap.

[Jon Bon]

PTF.

I am in the exact same situation but for different reasons. Slightly bigger house, but more people in it.

IMO you want move space, im not gonna tell you to pitch a tent in the back yard and work for there. More space it is.

So addition or move. I have no idea about your market but a few things come to mind.

1. Lot size, a 700 sqft house probably does not have a huge lot, a lot with >50% of it covered by house always looks and feels like crap IMO. So think about that.
2. Addition that feels like one. Your addition likely might be bigger than the entire house, so it is hard to get them to blend in together. (ask me how I know) doing an addition 'right' often requires tying the two structures together in a way that includes maximum cost and maximum construction issues. So just know that. You have got to remove load bearing walls, tie floors together, ceiling, paint, trim, doors have to match etc etc. ITs really hard and why additions can be so expensive per sqft.
3. Resale - what is your hood like? If you have only small baby houses and yours is 2000 sqft you are never going to get that back. Also you might feel differently as you get older maybe had a kid etc.
4. Long term - We are growing out of our house as well, its annoying. We need/want more space. There are some things even with major renovations we cant reasonably change. Kids change this, age changes this. If your 50 living in a house of 20 somethings neighborhood that can affect your enjoyment of the hood.

Bottom line: Likely move. I mean what does 600k get you in your area? Moving sucks but it takes 2 weeks. Additions are like moving but all your shit gets dirty and it takes 6 months! Also im totally sealing your spreadsheet thanks!

[soccerluvof4]

PTF.

I am in the exact same situation but for different reasons. Slightly bigger house, but more people in it.

IMO you want move space, im not gonna tell you to pitch a tent in the back yard and work for there. More space it is.

So addition or move. I have no idea about your market but a few things come to mind.

1. Lot size, a 700 sqft house probably does not have a huge lot, a lot with >50% of it covered by house always looks and feels like crap IMO. So think about that.
2. Addition that feels like one. Your addition likely might be bigger than the entire house, so it is hard to get them to blend in together. (ask me how I know) doing an addition 'right' often requires tying the two structures together in a way that includes maximum cost and maximum construction issues. So just know that. You have got to remove load bearing walls, tie floors together, ceiling, paint, trim, doors have to match etc etc. ITs really hard and why additions can be so expensive per sqft.
3. Resale - what is your hood like? If you have only small baby houses and yours is 2000 sqft you are never going to get that back. Also you might feel differently as you get older maybe had a kid etc.
4. Long term - We are growing out of our house as well, its annoying. We need/want more space. There are some things even with major renovations we cant reasonably change. Kids change this, age changes this. If your 50 living in a house of 20 somethings neighborhood that can affect your enjoyment of the hood.

Bottom line: Likely move. I mean what does 600k get you in your area? Moving sucks but it takes 2 weeks. Additions are like moving but all your shit gets dirty and it takes 6 months! Also im totally sealing your spreadsheet thanks!

+1 and if your thinking 220k it will probably end up being more than that

[ysette9]

Good post on the architecture side of things. We lived in a house that had a cardboard-box-attached-to-the-back-of-the-house-type addition and it showed. It sucked, looked ugly, wasn’t tied into the heat for the rest of the house and so was cold and musty when it wasn’t hot and musty. I remodeled  that sucker in my kind almost daily.

Someone down the street did a really nice addition recently. They added square footage to the side but opened up the roof and re-did the rafters so a new roof sits symmetrically over the entire footprint. It is a lot more work but the end result is a proper house with pleasing lines.