Look at the income invested and the rate of return it is expected to earn vs. putting it in the market at a similar investment risk.
So if you put $20,000 cash into development of your basement suite and you get $1000 rent less $500 marginal expenses then you have $500 NOI per month. Now look at what the holding period is for your home. Assume 5 years for this example. If the basement suite increases your home value by $10,000 when you sell in year 5, then the cash flows look like this:
CF time 0 = -20,000
CF time 1 = 6,000
CF time 2 = 6,000
CF time 3 = 6,000
CF time 4 = 6,000
CF time 5 = 6,000 + 10,000 = 16,000
Take those cash flows and plug them into a simple NPV worksheet: http://www.free-online-calculator-use.com/npv-calculator.html
For this example at a 12% discount rate, the NPV is $7,300. This means that on top of the initial $20,000 investment you would be willing to pay an additional $7,300 to purchase this investment, assuming that 12% is a sufficient return for this level of risk.
So if you put $20,000 cash into development of your basement suite and you get $1000 rent less $500 marginal expenses then you have $500 NOI per month. Now look at what the holding period is for your home. Assume 5 years for this example. If the basement suite increases your home value by $10,000 when you sell in year 5, then the cash flows look like this:
CF time 0 = -20,000
CF time 1 = 6,000
CF time 2 = 6,000
CF time 3 = 6,000
CF time 4 = 6,000
CF time 5 = 6,000 + 10,000 = 16,000
Take those cash flows and plug them into a simple NPV worksheet: http://www.free-online-calculator-use.com/npv-calculator.html
For this example at a 12% discount rate, the NPV is $7,300. This means that on top of the initial $20,000 investment you would be willing to pay an additional $7,300 to purchase this investment, assuming that 12% is a sufficient return for this level of risk.
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