Increasing and Decreasing Returns

Increasing and Decreasing Returns This principle relates to the relationship between the money spent on improvements and the value added to the property. Increasing returns occur when spending $1 on a renovation adds more than $1 to the property's value (e.g., adding a second bathroom to a three-bedroom house). Decreasing returns occur when the cost of the improvement is not fully recovered in the market value.Over-improvement A classic example of decreasing returns is an "over-improvement." This happens when an owner spends significantly more on a house than the neighborhood can support. For instance, installing a $100,000 swimming pool in a neighborhood where homes only sell for $150,000 is an over-improvement. The owner will not get that money back when they sell because the market value is capped by the surrounding properties.