How to look at rehab as an investment

[Bryan Cork]

I would like to know what is the equation, or metric that I should use to judge one potential project vs another in terms of cost and the potential increase in revenue that money should create. For example I have a 3/2 SFR that has an unfinished basement, if I spent 15k to finish it and added a bedroom and a full bath to bring in another $250 a month in rent. Or if I added A/C to the same unit for 4K and that got me $50 which is better? Now I know that that equation is pretty easy and it’s just a ratio of income/dollars spent, but the harder question is......should I do either? What I’m having real trouble with is if my property has a 5.0% cap rate now, how do I factor the cost of these projects into that? And if either of these don’t improve the existing cap rate then maybe they are not the right project for this specific project? Help me wrap my head around this a little more, thanks!