For most of us, our home is our biggest asset. For decades, home prices rose slowly and this provided people with a nest egg they could use to support themselves when they could no longer work. Then came the 80s and 90s and 00s and the price of real estate rose at a rate that was unsustainable. We all know what happened after that. Prices dropped. People’s nest eggs were wiped out. Homes were foreclosed on. Lives were ruined.
If you consider your home to be an asset, then you have to apply investment type thinking to your management of the asset. If you want a new kitchen, for example, you have to analyze the return on your investment. Not just the fact that you get to use a new, perfectly functional kitchen. Your kitchen will depreciate in value over time. So even if you put $50,000 into a new kitchen, this will not increase the value of your home by $50K. Over time, the kitchen will be worth less and less as it depreciates, or wears. That is, unless, the price of homes in your area is increasing by more than the kitchen depreciates. That’s where the calculus starts to get interesting. Check out the beautiful kitchens on this site about bath and kitchen remodeling Chicago. They cost a pretty penny when they were new, but they are worth less than their cost now. Five years out, a $50,000 kitchen remodel may only be worth $35,000 to the value of the home. Now, if the home was valued at $500,000 at the time of the remodel, and has been appreciating at 3% per year, then the home would be worth $579,000 in five years. The home has appreciated even though the kitchen’s cost has depreciated over time.
In an appreciating market, many things make sense financially. In a declining market, improvements like the above don’t make sense because you never really get your money out. Now if you can assign a value to enjoying the remodeling, then you can justify the expense. Just don’t expect to get dollar for dollar back on your investment over time. It just doesn’t work like that.