Build to the zoning maximum or build the smallest thing that rents

I've been sitting on this for four months and I want to hear how the room splits before I sign anything.

My lot allows a detached unit up to 1,150 square feet. Two bids, same builder, same site work, same trades.

Big version: 1,150 sq ft, two bedroom, one and a half bath. $247k all in including site work, sewer connection, and the utility trenching. Comps in my submarket say $2,150 to $2,300 for a detached two bedroom in decent shape.

Small version: 620 sq ft, one bedroom. $158k all in, same site work line, same trench, same connection fee. Rent range $1,550 to $1,700.

So the marginal $89k buys roughly $575 a month at the midpoints. That's $6,900 a year gross before anything, call it maybe $5,400 after the extra insurance, taxes, and the maintenance load on a second bathroom. Call it 6 percent on marginal cost. My cost of capital is a home equity line, so that marginal 6 percent is thin, and lines reprice, which is the part I don't like.

The case for building big anyway. Fixed costs are already spent on the small version, the trench and the connection and the permit and the mobilization don't shrink. You never get to come back and add 500 square feet at $178 a foot. And the appraised value contribution and the tenant pool both look better at two bedrooms, families stay longer than the one bedroom churn I'd expect.

The case for small. $89k less exposed, faster to build, and the one bedroom leases in nine days in my area against maybe three weeks for the two bedroom at the top of the local rent range. If rents flatten, the smaller unit is the one still full.

The assumption doing all the work here is whether the two bedroom actually clears $2,150 or whether I'm reading four listings and calling it a market.