In order to determine whether home improvements are worth the cost/headache, people compare the cost to the projected increase in value. For investment properties, I often see people compare the cost to the expected rent increase. For instance, if a $10,000 kitchen improvement will translate into $100/mo increase in rent, then it takes ~100 months to recoup your investment.
Let’s look at why this approach is misguided.
Continuing with the example above, let’s also remember that this increase in $100/mo translates into an increase in annual net operating income of $1200 (for sake of this example, let’s say costs and other income sources remain unchanged). Depending on your local cap rate (short for capitalization rates, explained at this link), this can, and often will, have a dramatic effect on the value of your property. If your local cap rate is 8%, your $10,000 just added $15,000 in value (at least on paper). If, on the other hand, local cap rates are 5%, you just added $24,000 in value (again, at least paper). The extra $100/mo in rental income is, of course, a very nice bon