I went the route you are going. I spent a lot of time and energy ripping my 180 DVD Collection using HandBrake and then tagging them. Then I would add them to iTunes like is being discussed here. Then I would need to keep a backup of the collection.
This is what I did, and I'm very happy with the way it works. But I have over 500 movies and 500 TV shows, which take up about 1TB on a 3TB disk so I have plenty of room to grow.
I considered various options for an iTunes server, like using my old 2008 Core2Duo MBP or 2008 Windows PC with similar specs. After a lot of thought, I opted for a new entry-level Mac Mini (2012 was the current model then, so mine has upgradeable memory and hard drives). I wanted to build a system that was fast, had a warranty and would last me for years to come. Just didn't like the idea of putting all the effort into 6 or 7 year old machine with a limited future.
The library is stored on a fast 3TB USB 3 external drive. I have two additional identical drives that I rotate for backups that are done nightly with a CCC script.
When I watch my ripped DVDs on AppleTV with my 46" Sony TV, sometimes the quality bothers me. I have a small 15" screen with AppleTV in the bedroom and they look pretty good there. On the screen of my 11" MBA they look fantastic.
For some of my favorite movies, I am buying the iTunes HD versions. But I just don't feel the additional file size and very long download times are worth the effort (my only internet option is Verizon DSL at less than 2mbit/sec). I also have a fair library of bluray disks but no plans to rip them.
It all depends on what you want I suppose. iTunes downloads are pretty expensive IMO. I can buy used DVDs at a store in the mall for about $5 each. With a fast Mac, it only takes 15 - 20 minutes to rip.
I like the idea of having a big library since I live in a rural location with no cable and slow internet.