Real Estate Council of Alberta Fundamentals Practice Exam

What principle states that capital improvements will only add value to a property up to a certain point?

1. Principal of Decreasing Return

2. Principal of Increasing/Decreasing Return

3. Principal of Highest and Best Use

4. Principal of Contribution

The correct answer is: Principal of Increasing/Decreasing Return

The principle that states that capital improvements will only add value to a property up to a certain point is best captured by the concept of diminishing returns. The principle of increasing/decreasing return reflects the idea that while investments in property—such as renovations or enhancements—might initially provide significant increases in value, there comes a point where each additional dollar spent yields less and less added value. For example, if you renovate an outdated kitchen, the value added to the home may be substantial. However, if you continue to invest excessively in luxurious features that exceed the neighborhood standards, the property may not appreciate in value commensurate with the expenditures. Eventually, the cost of improvements will surpass the value they bring, resulting in decreasing returns. Understanding this principle helps property owners make informed decisions about renovations and improvements, ensuring that their investments lead to desirable returns. It contrasts with the other principles, such as highest and best use, which focuses on optimizing use based on market value, or contribution, which emphasizes the added value of specific improvements without considering the diminishing returns aspect.