As buyers assess whether a property could provide a good return on investment, two key factors typically come into play: size and style. Both factors can attract future buyers, but for different reasons. As far as which one provides higher returns on a real estate investment, experts familiar with property values and ROI calculations say square footage wins the real estate ROI battle.
“When you’re talking about resale value, appraisal amount, mortgage approval, or any other process that seeks to put a dollar figure on an investment property, square footage eats design for lunch,” says California-based residential real estate developer Christopher Duffy. “When compared with design trends, square footage is by far a better indicator of resale value and loan options.”
Duffy is the Founder and CEO of Hummingbird Development, which emphasizes disciplined underwriting while delivering cost-efficient construction and strategic value-add improvements. He works with clients in Northern California, managing projects that balance functional design, construction quality, and investor returns. Duffy brings unique expertise to projects, built on his extensive experience with California real estate, including residential construction, real estate investing, and remodeling costs and trends.
Why square footage is the top factor when calculating ROI
Experts see square footage as the top indicator for ROI because of the process used to calculate real estate value and potential returns. For a potential buyer, design elements are often a strong draw. If you’re familiar with the concept of “curb appeal,” you know selling residential real estate requires more than just providing a spreadsheet with the facts and figures.
For a lender or investor, however, assigning value involves other factors. Loan officers aren’t interested in how a kitchen design makes them feel. Their investment decisions rely on formulas in which square footage plays a key role.
“While homes still get appraised in person, it’s important to realize that almost every real estate valuation process starts by looking at price per square foot,” Duffy explains. “A home shopper can tell their lender the design is amazing and justifies a higher per square foot price, and the appraiser may even agree to some extent, but at the end of the day, every valuation has to go through a spreadsheet and an algorithm. The process makes it almost impossible to overcome square footage with design in terms of value.”
When an investment in design upgrades can provide a good return
For those who want to increase the value of their property with a renovation project, adding square footage is the best way to secure a good ROI. However, adding square footage also requires a bigger investment than updating design elements.
“You can always redesign an existing space to your taste or current trends relatively inexpensively, but the cost of adding even one square foot is basically the cost of new construction,” Duffy says. “That’s why homeowners often seek to increase value through renovations after they buy a property. Even though adding to the footprint will provide a higher ROI, the work required to drive that increase is often cost-prohibitive.”
Duffy also notes that design upgrades can play an important role in increasing the total return on residential real estate because of their ability to attract a buyer. With rental properties, investors put a high priority on square footage because it defines the number of tenants a property can accommodate and, consequently, the volume of rental income it can produce. With residential, a buyer’s decision to pursue a property is often driven by emotions as much as by mathematics.
“The feeling a buyer gets when they walk through a house is important, which is where design comes into play,” Duffy says. “I’ve been in 2,000 square foot houses that have an open concept and a nice layout that makes them feel larger than 3,000 square foot houses that are divided and feel cramped. A buyer will intuitively like the smaller house better, which makes them more likely to pay a premium.”
Why real estate investors seeking high returns can’t ignore square footage
Design elements can undoubtedly add value to a home in the eyes of a buyer. But if that value is purely aesthetic, it typically won’t influence what the mortgage company is willing to underwrite and what the appraiser is willing to sign off on. That will always come down to square footage.
“If you’re an investor or developer competing with other properties that have similar square footage, good design might tip the scales in circumstances where it’s a close call, which essentially means it adds some overall value,” Duffy says. “But generally speaking, I wouldn’t trade square footage for design. A good design only goes so far.”