Home: An Appreciating Asset Filled With Depreciating Stuff

I believe I could make the argument that home ownership, in its current form, is making us poorer because of the depreciating consumer goods we choose to fill it with. While at its very heart, a home is a magnificent kernel of responsible living and financial well-being, over the years it has become something more…and certainly more destructive. We have come to believe it is obviously the wise financial choice for anyone in a position to buy a home to simply do so. It does not take much more thought than that. Of course, this is not the nature of investing. Rarely is there a financial choice that we can all make that simply produces profit without risk…but more on that in another post.

What we’ve done in housing is taken that great core concept of land and shelter (which appreciate with inflation) and made them shrines of awesome living. We fill them with granite, wood, marble expensive MoneyHousesmcarpet, and finishes. We upgrade perfectly functional spaces because we can make them look better. We assume that money that we spend in renovations or upgrades is an investment. Believing we will get to enjoy it and will reap a financial reward.

While ‘real property’, including the land, the structure and the stuff attached to it, will grow in value as a whole, the structure and stuff attached to it without the land is called a trailer and simply ages, decays and becomes obsolete like everything else.  I know you think that kitchen you’ve designed is timeless… but in fifteen years some buyer will be snickering behind your back at your choice of colors and materials.  Of course , if you wait long enough it might be ‘retro’ with a small contingent of specialty buyers.

The issue generally isn’t filling your home with stuff you don’t need, it’s buying too much and too nice of the stuff you do need. While all homes need kitchens and baths, that  ‘dream’ kitchen or ‘dream’ bathroom is simply going to decay over time and eventually need to be upgraded again. So years later, your new kitchen is an old kitchen and the money you spent was for your enjoyment alone. It does not appreciate in value the way that the core property does. Where homeowners go wrong (financially speaking) is the degree to which we fill our homes with stuff and the quality of the stuff that we fill it with. From a return on investment standpoint a home should have an appropriate (leaning towards modest) level of features of an appropriate (leaning towards modest) cost and quality for the area it is located.  People pay a premium and lose money to own the nicest home on the block.  These are the folks helping their more modest neighbors profit it when it comes time to sell.

My acid test for telling the difference between appreciating and depreciating components of a home is to imagine you are preparing the home to rent out to tenants.  What do you put in it to make money as a rental unit?  It isn’t the nicest fixtures, features, carpets etc.  Talk to income property owners… all glamour is out the window. The stuff you put in a rental property appreciates as a whole far better than the elegant stuff filling fancy homes.  Anything nicer than what goes in a rental home is an expense for your own enjoyment.  There’s nothing wrong with that, but be aware, because that could be your kids college fund, a trip to Hawaii or a retirement plan.

In the end, a home is really just a basic appreciating asset, filled with depreciating stuff. The stuff grows old and becomes worth less. Buying dozens and dozens of consumer products that are just going to decline in value is not the investment we make ourselves believe it is.

If you have read my articles before, you’ll know I strongly object to the romanticized image of a ‘dream home’, encouraging people to be sure to get a home with as much of the nicest stuff they can afford. I believe that is financially reckless and a disservice sold upon the home buying and owning public.

If you’re looking to build your ‘nest egg’, a relatively simple and modest, well cared for home, appropriate for the area it is in, will grow in value along with inflation. All the extra stuff you spend money on to make it pleasing to your tastes is simply you spending your money for your own enjoyment. So, if you are hoping to build value in your home, be mindful and make smart choices when buying or looking to upgrade the stuff in your home.