Depreciating Assets vs Appreciating Assets
When you’re interested in investing, there’s a lot of terminology that gets thrown around in conversation, in articles, and in the news, making it challenging to keep everything straight.
It can be especially challenging if you’re a first-time investor trying to successfully navigate the investing world.
Two such terms you might have heard are ‘depreciating assets’ and ‘appreciating assets.’ So, what are they?
If you’re not familiar with the terms, depreciation is when the value of an asset decreases and appreciation is when the value of an asset increases. Therefore, a depreciating asset is an asset that continues to decrease in value over time whereas an appreciating asset is an asset that increases in value.
Depreciating assets are items that you spend cash for, that don’t increase in value, and that you often have to spend more cash on in order to maintain or hold them. Some people get depreciation and a depreciating asset confused, because depreciation can mean two different things in the world of finance. In addition to the devaluing of an asset, it also refers to the accounting process of writing off the cost of business equipment over time as opposed to writing it all off in the year it was incurred.
Market Value of Assets
In the investing world, an asset is given a certain value. There are two different types of value: market value and book value. Market value is the value given to an asset based on supply and demand.
When there is a lack of supply and/or an increase in demand for a product or service in addition to changing interest rates or inflation, appreciation can happen. Depreciation can also happen when there is an increase in supply and a decrease in demand.
Assets that are exchanged readily, such as stocks or commodities, can increase or decrease in value daily. Assets, such as real estate, that aren’t traded on a national exchange may lose or gain value over a longer period of time.
Book value is the value of an asset based on the cost of that asset to the buyer. Any profit or loss on an asset upon sale is determined by subtracting the cost of the asset (book value) from the market value. What you would pay for that particular asset today is considered the current market value.
Types of Appreciating Assets and Depreciating Assets
Items that are unique, such as a Picasso painting, or that meet basic human needs are generally assets that increase in value due to the fact that demand exceeds supply over time.
While jewelry and cars often have personal or sentimental value, they depreciate in value pretty rapidly. If you purchase a gold necklace that is priced high because demand is relatively high for it, the value will drop by half or even a quarter of the price you purchased it at because second hand goods are not valued as high as new goods. Cars wear down, break down, become dated, buyer preferences change, and thus they depreciate very quickly.
When it comes to investing in property, a house definitely is a basic human need, but the house depreciates over time as it gets old, as things break, or as it goes out of style. The land a house is built on, however, typically increases in value, making property an excellent appreciating asset to buy if you know what to look for.
Hopefully, this helps you differentiate between a depreciating and appreciating asset.
If you have questions about purchasing an investment property or would like to speak to a qualified real estate professional, contact us.
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