Up or out? That is the question. You need space and you want the most for your money. Your home site might make the decision for you. If you don't have much of a yard to the sides of your home or behind it, up might be the only way to go. Local zoning laws also come into play. The cheapest solution depends on various factors, as each situation is different.
Ground Floor Additions
If you've got the yard space for it, ground floor additions are generally easier. There's far less disruption of your house than when adding a second story. Depending on the configuration of your house, an addition might be built off an existing doorway, lessening the expense of taking down walls. You might also save on architectural design costs that would be required for building up. If you have to move power lines or work around sewer lines, that can add to the expense.
Adding a second story means there's already a foundation in place. You must make sure the existing foundation and the footings are strong enough to carry a second story. If your building inspector finds the foundation can handle it, this can be a cheaper way to go. If you need to reinforce the walls or foundation, building an addition is likely less expensive. Going up rather than out can save money for heating and cooling ducts, pipes and other necessary materials. Up rather than out tends to be a shorter route for ducts or piping, although it all depends on the home's construction. However, the more involved work of building up means higher labor costs.
It's more than just construction costs that you must take into consideration. If you decide to go with a second story, the roof will have to come off and you'll probably need to find temporary living quarters. It's one thing to stay with friends or relatives and another to add days or weeks of hotel bills and meals to your budget. There's also a greater risk of damage to the rest of the house, such as the ceilings and floors on the ground floor.
Don't forget that besides up and out there is also down. Finishing a basement might be the most cost-efficient way to increase living space, much cheaper than either building up or out. If you have an attached garage, putting a room or two over it might be a possibility, if the foundation and bearing walls can hold a second story. You would have to work with an architect to make this arrangement aesthetically pleasing, but it doesn't involve the disruption and relocation found in a complete second-story addition.