Investing in Classic Cars 101

Investing & Retiring, Other Investments

Investing in classic cars is an excellent way to make money if you know what you are doing, and it is an even better way to lose money if you do not.

Recent returns on classic cars are attractive. The Historic Automobile Group Index (HAGI), a tracker of exotic cars, reported a 39% increase in the value of classic cars in 2013. Hagerty, an insurer specializing in classic cars, shows a rise in 61% of their “Blue Chip Index” of classic cars over a four-year period spanning August 2009 to August 2013 – comparing favorably to the S&P 500 (+73%) and gold (+46%) in the same time period.

Still, before diving in, ask yourself why you want to invest in classic cars.

  • Labor of Love – Do you love the idea of owning and driving one or more classic cars? Is there a “cool” factor associated with them – perhaps cars of your youth? You probably have the expertise to identify and negotiate a reasonable deal. You also are more likely to buy on impulse, and may have a hard time selling certain cars at any price. However, if you are buying a classic car more for love than for future profit, your downside is reduced.
  • Mechanic/Flipper – Do you enjoy buying and restoring older cars in lesser condition, and are you talented at it? You probably have the best combination of automobile knowledge, appraisal and lack of attachment to be able to invest in cars. You increase value as opposed to waiting for natural appreciation.
  • Pure Investment – It is hard to invest in any collectible market without an in-depth understanding of it. There are plenty of resources to help you track the market trends, but be sure you fully understand the market you have chosen – the buyers, their usual motivations, and the costs of doing business with them. HAGI is a good beginning resource, broken down by sub-markets (such as Porsche and Ferrari).

These are generalizations, but with grains of truth behind them. This sort of self-analysis will help you to understand your potential weak spots with respect to investing.

Regardless of your reason to be in the classic car market, you will need to consider these factors to succeed:

  • Costs – You will incur maintenance, insurance, and storage costs, as well as costs associated with buying and selling (such as auction fees, transport costs, and sales commissions). Capital gains of up to 31.8% may apply as well. Be sure to include these factors in your cost analysis.
  • Liquidity – If you cannot afford significant non-liquid assets, you probably do not want to be in this market.
  • Legal Issues – Make sure you understand your state laws regarding auto sales. You may be required to get a dealer’s license or be limited to a certain number of sales/purchases in a year.
  • Use – Do you intend to drive the car? If so, check the effect of miles on the depreciation or appreciation value, if any.
  • Appraisal Skills – Can you spot a bargain, and do you have the skills to turn it into a profit? If not, do you have a friend with this kind of experience, or can you hire a professional to provide his or her opinion on a candidate vehicle?
  • Market Understanding – Do you understand the market you are in, and do you have the researching skills to fill in the gaps?
  • Attachment – Can you let go of a car when a deal is too good to pass up?

In general, the costs associated with maintaining, purchasing, and selling classic cars, along with the relatively high volatility of prices, make for a difficult investment. However, for the knowledgeable and diligent buyer, there is significant money to be made. Invest in what you know and look for bargains.

If you become too attached to the cars to sell them, then just admit to yourself that it’s an expensive hobby. And driving a head-turning classic down the street is a lot more exciting than squinting at a stamp through a magnifying glass!

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