Heading up, going down or blowing out?

Recently I purchased a small house, 850 square feet, I am planning on remodeling and selling it. However, a house so small is not necessarily that desirable to many people, especially families. The question at hand is, how do I make it more desirable? It is a cute little cottage with two bedrooms and a bathroom, easy enough to remodel, but the real answer is not just new paint, tile and granite counter-tops; square footage is the answer. Adding another 500 square feet would be ideal. So the next question is where should the square footage be? Up, down or out? Basement - there is height available and there is about 500 square feet that could be legalized for living space. Building out - there is a sizable yard, I could build out one or two rooms and still have yard available. Second story - there is always the option of building on top of this house, I could add one or two rooms or the entire first floor square footage could be repeated above. So, which option is the most cost effective upfront and which will give the greatest return on a house set to sell in the near future? We should consider the ease of the project, the permitting implications, the complexity, the aesthetics the cost and finally the return on investment ROI. Basement remodels tend to be fairly simple, but can easily get complicated and expensive. The easiest situation is if the basement is already dry and the ceiling height is legal or above, if these two conditions are in place the project can be fairly simple. Cutting in egress windows is necessary for legal living space, and this is fairly affordable. The average cost to remodel an "average" sized basement in Portland in 2014 is $22,110 according to homeadvisor.com. However, remodelling.hw.net says the cost of remodeling a basement in Portland Oregon is $65,342. Most analysts agree that the return on investment for basements in Portland is around 87%. This makes the methods and the final cost crucial when doing a renovation or one could actually lose on the investment. Building out is relatively easy, adding to the roof line can be expensive and adding to the foundation can be too, then there is the complex questions of what is yard space valued at, and how will the added square footage fit with the existing house? THe cost per square foot is fairly predictable in this kind of addition, between $110/sqft and $150/sqft are reasonable figures, a budget of $60,000 would get you a decent new addition of a bedroom and bathroom. The return on investment for an additional room is only around 69%, but an additional bedroom is actually 80 to 120%, depending on the improvement and the neighborhood. Adding a second story room or rooms is a little more complex. There are questions about the foundation and the existing wall framing and sheathing. There are complexities that require an engineer to submit calculations adding a layer of cost. There will also be a reduction of floor space somewhere in the house to allow for new stairs to the second floor. The average cost of a second story addition in Portland Oregon runs from $150 to $250 per square foot, with huge variations. The return on investment according to remodelling.hw.net (for an attic bedroom) is around 84%. All these remodels are very similar in the return ranges. The real dilemma comes in the variables. The cost differences among the three options are fairly vast, from $22, 000 low end for a basement remodel through to a possible high-end of $125,000 for a 500 square foot second story addition. Crucially here, my return on investment should be higher than your average Joe, as a contractor I am performing the work myself and reducing the overall cost of the project, I am also working on certain investment assumptions that revolve around my investment, like the price at which I bought in and the price at which I can sell. The decision will have to come down to our budget and our ideal target customer on the other end. We'll keep you posted.