Functionality and style may be attractive characteristics that lead first-time home buyers and investors to expect increased property value. But even the most visually stunning home may fall short of appreciation expectations, understand why.
“Location, location, location”
This saying still holds as accurate as when the first sage Real Estate Professional said it. Purchasing a home is considered one of the most significant financial investments a buyer will make in their lifetime. Recognizing the distinction between an improved portion of a property and the land underneath may seem inconsequential; but the physical structure of a home will depreciate over time, while the land on which it sits will appreciate. By solely focusing on the functionality or aesthetics of a house, potentially compromising the property’s ability to generate wealth over time.
Appreciation of Land
Property prices tend to be a function of supply and demand in the local economy. While physical aesthetics and maintenance of the physical structure will impact value, they are less significant. Understanding how location and prospects of land values influence property return allows investors to make better choices between competing assets. The reason is simple. Demand increases as populations increase, and as land is a limited resource, it appreciates value. Exceptions to this include circumstances that either limit demand or make the land unusable.
Depreciation of the Home
The physical structure of a home, left entirely alone, will depreciate until it no longer adds value to the land it sits on. The question then becomes: why are owners advised to invest capital to update their home? The reason is to offset the depreciation that is reducing the value of the structure. These capital-intensive investments are more about helping to maximize the value of the home rather than updating the aesthetic.
The Local Market
For home buyers looking for a return on their investment, focusing on how location in the local market will affect appreciation over time becomes essential. Locations within neighborhoods will affect land values. For example, areas with cul-de-sacs imply reduced traffic and increased safety for children compared to homes on busier roadways. Additionally, most neighborhoods evolve their own social, cultural and demographic characteristics over time that impact demand.
Understanding factors that affect home values offer buyers the ability to focus on opportunities that will enhance their investment over time.
If you have questions about what your home might be worth contact the real estate professionals at Richardson Properties or call us at (805) 781-6040.