Home Economics & the Rule of ¾

When I was in middle school, Home Economics was still a required subject. Mrs. Darcy was my teacher, and I don’t think we covered anything about homes or the economic principles that make them work for real people. I do, however, vividly remember absolutely incinerating a batch of muffins in the oven one day.

Now, it’s decades later. My muffins are still bad, but making home economics make sense both in principle and in practice is a big part of my business. At HUTS, our clients engage us in equal parts for our home design approach and our process of home development.

As home designers, we care about use, form, shape, material logic, buildability, finish quality, aesthetics, context, sustainability, and a whole host of other considerations.

As home developers, those design considerations all figure into our work, of course. But, we also craft the development strategy to get our client’s projects to add up, or “pencil.” To make sure the math checks out. To make sure that by working with HUTS, the client is reducing their risk throughout the process, creating value for themselves, and staying right-side-up on their property investment.

For us, a successful new construction home adheres to our 3/4 Rule.

What’s that?

It’s the notion that for three parts input (of effort / energy / time / capital) at each stage in the project, there should be 4 parts value created. 3/4.

3/4: Capital Expenditure vs. Resulting Value

The land acquisition costs plus the cost of construction should be 3/4 of the resulting trade value of the completed home. You bought land and built a house for $600k? Ideally, that’s a property that could fetch an $800k purchase price upon completion. We want you to enjoy your home after completion, but you should also have a net-positive asset with stored equity. Put another way, you should have options, and good ones. If you choose (or need) to sell for whatever reason, the sale proceeds should be written in black (rather than red) ink.

3/4: Carrying Costs vs. Revenue

If your property is a second home that you plan on renting out much of the time, the ¾ rule also applies. We endeavor for the carrying cost of your home to be ¾ of the anticipated revenue you can generate from renting the property ¾ of the time.

Huh?

Let’s say that between your mortgage, your taxes and insurance, your carrying cost is $3,000 / month. A goal for your home is that it could generate at least $4,000 / month in rental revenue. Further, you should be able to generate that $4,000 by renting the property only ¾ of the time, or around 21 or 22 nights / month. That’s a property that pays for itself and some while still providing you 8 nights / month or about 3 months / year to make use of the place.

Design and Build 3/4 the square footage

One of the easiest ways to make the ¾ home economics rule add up for your home is to build ¾ of the house you thought you needed. Reducing your footprint while retaining the same functionality is a shortcut to a less expensive build cost, and leads to a better outcome than cutting corners on materials, systems and other means of reducing costs. And, dropping that square footage and tightening up the plan rarely affects the home’s ability to generate comparable rental revenue.

A well-designed 1200 SF home will always get closer to hitting the ¾ Rule than a 1600 SF home with bloated spaces and the same functionality. Costs less to build, costs less to manage and upkeep, and produces similar sale prices and rental revenue.

Same goes for 600 vs 800, 1800 SF vs. 2400 SF, and so on.

Like every rule of thumb, there are all kinds of caveats to this, and it’s an organizing principle, not a guarantee. Your area may have high costs of construction and poor sales figures. Or a weak rental market that’s inconsistent or very seasonal. Or, maybe you’re prone to burning the hell out of muffins in your kitchen and your insurance premiums are throwing your numbers out of whack.

Lots of factors can impact the ¾ Rule and your personal home economics, but our goal at HUTS is to help you to get the home outcome you want: both a beautiful design and a sound investment.

Let's Do Something!

• Do you have land and are ready to move forward with a home design and development project? We're ready to chat about it, in most parts of the country. Get Started HERE!
• You can't design and develop a home that's floating in space (yet). You're gonna need some land. Start with LAND. We've worked our asses off sourcing, documenting, researching and presenting the best buildable, affordable (150k and less) and beautiful lots within 4 hours of NYC.
• Have a smaller budget? Or, want a small cottage that can support a big life? Our ADUs are remarkable structures and no matter what you have in mind - guest cottage, rental unit, small home while you wait on construction, whatever - the construction cost vs. value on our ADU designs just make sense. Buy your plans HERE.