Appreciating assets are things that store value and have potential to appreciate in price over time. However, appreciating assets can also decline in price and lose value over time, depending on both micro- and macroeconomic factors. People typically buy appreciating assets as a wealth-building strategy, including real estate, stock, and other tangible and intangible things.
How Appreciating Assets Work
An “asset” can be physical or non-physical and is something that has value, and therefore a price. These assets can either go up or down in price, depending on the supply and demand of that asset and all the factors that influence it. Appreciating assets are assets that can go up in price and are typically purchased as an investment strategy understanding that values should increase over time.
However, price appreciation is not guaranteed, and appreciating assets can lose value, too. The key to understand is that appreciating assets have the ability or are relatively likely to go up in value over time, and not that they necessarily will. This differs from depreciating assets, which are understood to decline in value over time and are typically purchased for enjoyment, rather than as a sound financial strategy.
Investors typically take a balanced approach to purchasing appreciating assets and create a “portfolio” of different types of assets that can go up in value over time. While are better than others depending on your investment objectives, it’s always good to have a good mix of multiple appreciating assets.
The types of appreciating assets are many, but the most common are:
- Real Estate – Physical assets like houses, apartment complexes, or commercial spaces like office buildings or restaurant locations.
- Private Equity – Company ownership of a private business, such as starting your own company or investing in a startup.
- Public Stock – Company ownership in a publicly-traded business, like owning shares of Facebook or Amazon.
- Alternative Investments – Somewhat risky and less common appreciating assets, such as Bitcoin, financial options, and other trading products.
For this reason, I suggest investing in real estate, private equity (i.e. starting your own company or investing in someone else’s), public companies (I like blue-chippers like Apple), as well as some alternative investments if you want. However, there are more investment options that we will dig into below.
Appreciating Assets Example
If you take $1,000 and invest in Google (public stock), for example, and the value of your shares increases to $1,100 after a month, you’ve just made an additional 10% on your money without doing a thing. This is price appreciation and the value of your asset appreciating over time.
The same thing goes for real estate, like a home, which is both functional and stores its value well. If you purchase a home for $500,000 and then sell it for $600,000 five years later, you make 20% on your money – just by living in a house.
Now, when you add in a mortgage, property taxes, and other fees, the math gets a little wonky, but just know that real estate typically increases in value (2008 willing). This is why appreciating assets are so important. You invest in them with your existing dollars with the expectation that your money will grow over the short-, medium-, or long-term. If you want to achieve personal wealth, you have to invest in a diverse mix of appreciating assets.
How Depreciating Assets Work
A depreciating asset is one that while functional, might not store its value well. In fact, once you purchase the asset, its value will typically decline steadily until it hits its “salvage value”, which is basically the price you’d get for scrapping it at a junkyard. While appreciating assets are purchased to increase in value, depreciating assets are purchased to be used and enjoyed.
A car is a great example of a depreciating asset. While there are some cars which increase in value, almost all cars decline in value quickly over time, and people almost always assume that they’ll sell their car for less than they paid for it. Why own it, then? Doesn’t sound like a good financial decision.
Well, that’s because it’s not a financial decision at all, it’s a decision of convenience and need. You probably are required to have a car for work. While it would be great to purchase a classic show car and leave it in your garage, waiting for its price to increase, we typically need to use the car functionally, which causes it to decline in value, meaning that you’re losing money over time.
This decline in value is known as depreciation, which is why this is a depreciating asset. Yes, in a few instances a car can increase in value, but almost 100% of the time, it’s going to decline. Knowing this, it’s often best to lease depreciating assets so you know the cost of convenience. For example, if you lease a car for two years, you know the exact cost over that two-year period, rather than taking out a five-year car loan to finance a vehicle that loses over 50% of its value the first year.
Depreciating Assets Example
So, using a car as an example, you might purchase one for $10,000 and sell it five years later for $5,000. This means that your asset depreciated (or lost value) by 50% and you essentially “lost” $5,000 on the investment. But the point of a car isn’t to make money off of it, but rather to make your life more convenient.
Is the convenience worth $5,000? That’s up to you to decide. The bottom line is that depreciating assets, while working against your personal wealth, typically increase the overall value of your life (i.e. happiness, convenience, etc.).
However, it might be a good idea to lease these types of assets. Continuing the example, with a five-year car loan you might’ve lost $5,000, but if you had leased it for two years, you would’ve been able to return it at only two-fifths of the cost, allowing you to assess whether you want to renew your lease or do something else, helping you financially.
For a more detailed example of the cost of car ownership, read my article on the cost of owning a car.
How to Build Personal Wealth in Two Steps
Personal wealth comes from increasing your cash inflows and decreasing your cash outflows. So, if appreciating assets increase your cash inflows but depreciating assets do the opposite, how can we achieve personal wealth? Well, the key is to purchase appreciating assets and lease depreciating assets.
Here’s how you should manage your assets in two simple steps:
1. Purchase Appreciating Assets
Appreciating assets hold their value well. These are the assets that make your money work for you, potentially increasing in price over time, allowing you to eventually sell them for more than you paid. You want to own appreciating assets so that you can take advantage of this price increase. Purchase assets via things like 401(k)s, investment accounts, and more.
Appreciating assets are the ones that result in monetary wealth. If you don’t invest, your money will slowly erode and you’ll never become wealthy.
Think about it this way. Inflation is roughly 2% a year. This means that every year, a dollar becomes 2% less valuable. The price of a candy bar in the year 1955 and the price of a candy bar today is inflation. It’s not necessarily that your dollars become less valuable so much as everything you buy becomes more expensive over time.
So, if you don’t invest your money in appreciating assets, that is, if you keep it sitting in a checking or savings account, you’re effectively losing 2% a year (minus the breadcrumbs the banks’ call interest). This means that at the very least, you need to make 2% a year on appreciating assets to remain even.
If you want to actually get off the rat race-fueled treadmill, you’ll need to make as much as 6% – 10% on your money, on average. Otherwise, you’ll be working your job right past retirement. It therefore makes sense to purchase appreciating assets. It’s the only way to achieve personal wealth.
2. Lease Depreciating Assets
Still, while depreciating assets aren’t good stores of value, they’re usually necessary because of their functionality. Remember the car. So, while it makes sense to purchase appreciating assets, wouldn’t it make sense to NOT own depreciating assets? Instead, why don’t we lease our depreciating assets, thereby paying for convenience on a monthly basis?
The benefit of leasing a depreciating asset is that you pay for its monthly “functional value” without being stuck with a declining asset. For example, let’s say that you can lease your dream car for $350 / month. Well, is the value derived from the car worth $350 a month? If so, it would make sense to pay the monthly price tag for its benefits.
But if you were to own the same car, you’d have to worry about the annual depreciation, maintenance, and hope that you’ll be able to sell it at a later date for somewhere close to its sticker price. And if you’re familiar with cars, that’s basically an impossible task.
Therefore, when you lease a depreciating asset, you’re literally paying for the increase in your life’s value, whereas when you buy one, you’re making a negative investment. When you lease a depreciating asset and the monthly recurring value to your life diminishes, you can break your lease, returning it without having to sell it in the hopes of recouping some of your money.
List of Appreciating Assets & Where to Buy
Appreciating assets can be bought almost anywhere:
If you’re interested in stocks, you might want to check out Betterment or WealthFront. Both of these companies are “robo advisors” and they use computer algorithms to invest your money for you. They ask you a series of questions to assess your investor profile (desired level of risk, desired return, etc.) and then curate a diversified portfolio that fits your needs.
Private equity, that is, an ownership stake in a private business like a startup, is hard to come by. You typically have to know someone starting a business, be an accredited angel investor or venture capitalist, or start your own business. However, there are sites like AngelList that list startups raising money as well as platforms like IndieGoGo, which has an equity crowdfunding component.
Residential & Commercial Real Estate
If you’re interested in real estate…you better start saving. Just kidding, but really though. Real estate assets typically require 20% as a down payment. The rest is covered by a mortgage or loan. However, there are FHA loans and other alternatives that help you purchase a house with as little as 3% – 5% down. For more information on these types of loans, check out Rocket Mortgage or Chase Bank.
Crowdfunded Real Estate
Crowdfunded real estate, at its core, is similar to investing residential or commercial real estate the traditional way. However, investing in a crowdfunded real estate project opens more doors because you can invest in a piece of a larger residential or commercial real estate asset or even in a portfolio of real estate. This is beneficial because you can often invest as little as $5k and gain real estate exposure that can increase in value over time, rather than having to save to purchase an entire property, including taking out a loan.
If you’re interested in crowdfunded real estate projects, check out Fundrise. It’s a crowdfunding site that allows you to invest in real estate projects for less than a traditional downpayment.
While not a primary appreciating asset, it’s possible to generate returns by lending money to people in need of a loan. One form of this is peer-to-peer lending, which, like crowdfunding real estate sites like Fundrise, pools investor money together to offer larger loans to people who need money for personal reasons or for a business venture. The income you earn of this type of lending is similar to how a bank earns income off of loans – via interest. For more information, check out Lending Club.
Finally, there are other appreciating assets like commodities, options, swaptions, and almost any other name you can make up in your head. Just know that these appreciating assets aren’t for the faint of heart, and if you’re a beginning investor, stick to public stocks and real estate.
List of Depreciating Assets & Where to Lease
You can find depreciating assets almost anywhere. Cars, boats, furniture, and the rest can be found online, in galleries, at dealerships, etc. I think you get it. Just know that as soon as you drive your new car off that lot, you’ll never be able to sell it for as much as you paid for it.
For this reason, it’s a good idea to lease depreciating assets so you know exactly how much you’re paying for convenience over a set number of years. Once that period is up, you can return the asset without having to own it as it further declines in value, letting you re-assess what you want to do, both with the convenience of your life as well as financially.
The Importance of Appreciating Assets
Assets are important because, well, they’re assets! Specifically, they’re important for two reasons:
- Assets act as a store of value
- Assets are often functional
The first reason is the most common when we think about assets, especially when we’re investing. When we invest in an asset, we’re expecting that the value of the asset will increase over time. This means that assets “store value,” i.e., you can purchase an asset and hold onto it before selling it at a later date (hopefully for more money than you bought it).
The second reason is slightly less common but much more necessary. A house, for example, would be a good example of an asset that both stores value and is also functional. It might increase in value, sure, but the most important thing is that you have a roof over your head.
However, a house is an example of an asset that can both increase in value as well as act as something functional. There are other assets, known as depreciating assets, that might be functional, but don’t store their value very well. A car would be a good example of a functional asset that declines in value over time.
Frequently Asked Questions (FAQ)
What Are Depreciable Assets for a Business?
Depreciable assets for a business are typically things like equipment and hardware that decline in value over time. For example, anything from a new computer to a new piece of warehouse equipment is a depreciable asset. When a company purchases it, instead of recognizing the expense on their books, lowing their operating income, they depreciate it, spreading the cost over the life of the asset.
Depreciating Assets Become What Over Time?
Depreciating assets lose their value over time until they reach their salvage value. When this happens, they lose their effectiveness as a piece of hardware or equipment and must be disposed of, allowing a company to write it off its books and capturing some return value.
What is Depreciation in Accounting?
Depreciation in accounting is the measurement used to track the decline in an asset’s value over time. There are many different methods of depreciation in accounting, but typically, an asset’s cost is spread out over its useful life, recognized as a monthly expense on a company’s income statement. This is the opposite of expensing it and recognizing 100% of the cost as an operating expense in the period it was purchased.
Do Depreciating Assets Become More Valuable Over Time?
No, only appreciating assets become more valuable over time. Depreciating assets are typically useful and convenient assets used out of want or necessity, rather than as a store of value.
Is a House Considered an Appreciating Asset?
Yes, a house is considered an appreciating asset. In fact, any piece of real estate is considered an appreciating asset. Remember, however, that not all appreciating assets actually increase in value, only that they have the ability to increase.
Do Homes Appreciate or Depreciate?
Homes can both appreciate as well a depreciate in value over time. It’s common for houses to increase in value over the long-term. However, in the short-term, housing prices can be volatile and increase/decrease in spurts.
What are Long-Term Appreciating Assets?
Long-term appreciating assets are assets that people typically hold for more than one year because they are known to increase in value over time. A house is a good example of a long-term appreciating asset. Bitcoin would be a bad example as it’s price swings wildly in the short-term and is typically held for less than one year by investors.
What are the Best Physical Assets to Buy?
The best physical assets to buy are ones that appreciate. Traditional physical assets like this include houses, land, or collectors’ items like classic cars that can increase in value over time.
Overall, appreciating assets are used as an investment strategy as a store of value while depreciating assets are used out of desire or necessity. When building your wealth, make sure you purchase appreciating assets to take advantage of price increases while leasing depreciating assets so you only pay for what you use.