Apr 17
Everyone knows that when you buy a new car, the moment you drive that lovely new machine off the lot, it is worth less than what you paid for it. In accounting vernacular, a car is a depreciating asset and falls in value with each passing day.
Unlike cars, real estate and homes have historically been appreciating assets that have increased rather than decreased in value. Despite the bursting of the real estate bubble, anyone who has owned a home for a decade or more in Colorado has seen their home become worth more than they paid for it…it’s an appreciating asset.
But what is actually appreciating?
The reality is that the land underneath the home is what is driving this appreciation. The structure that sits on top of the land, the home, is actually a depreciating asset not unlike a car. As the structure ages, its value falls, unless homes improvements are made or remodels undertaken. However, the land the home sits on is an asset with a limited supply. As a result, it tends to become more valuable over time.
Why is this important?
When buying a home, it is easy to get focused on the home itself – the finishes, the granite, the floor coverings. These are important considerations, but what ultimately will play the biggest part in whether your home value rises or falls is the land – the size and orientation of the lot, its location, privacy, and its natural amenities such as views and proximity to open space. Note – Condo values are also dictated by the fraction of land that you purchase as part of the development.
A well known maxim in real estate is “location, location, location”.
A related, but less known corrolary is “when you buy a home, what you’re really buying is a piece of land.”
