Classic car investing tips
Independent investment tips for the professional at Leisure
See my related notes in
investing in a classic Rolls Royce.
With the stock market in the dumpster many people are
looking for alternative investment opportunities.
People tout precious metals and tangibles, but one intriguing
tangible is investing in a classic car.
The theory is that you can buy the car, drive it and
enjoy it, and sell it years later at a profit.
Back in the recession of 1973 through 1975, I regularly
bought and sold classic cars for a profit, so I'm convinced that it can be
done, provided that you are a savvy car buyer and do your homework.
Drive a classic car and make money!
Let's take a closer look at this idea of antique cars
as an investment.
Car depreciation and investment
Everyone knows that buying a new car is never a good
investment. A new car
depreciates by 50% the minute you drive it from the lot, but a more accurate
approximation of deprecation is 20%, making the cat worth one-fifth less
each year. This depreciation
schedule results in the
typical 1/x equation:
The hope when investing in a classic car is that you
will be able to buy the car at the fully-depreciated value (usually 10-15
years), and that the market for the car will increase over time:
But what makes a car appreciate?
Larry Daniel (BSBA, University of North Carolina), is
owner of Motorcar Investments, and he says that the market for auto
investments is fickle.
Larry Daniel with a classic investment Ferrari
Once a car is fully depreciated, the ongoing value is
solely a function of demand.
Some factors that drive this demand:
Scarcity - Scarcity is a
determining variable in the appreciation of an antique car, but it's not
the only factor. For
example, an ordinary 1967 Mustang can be bought for under $15,000, but a
rarer Shelby Mustang can cost upwards of a quarter million dollars.
On the other hand, scarcity is not the only factor.
A rare 1959 Cadillac "Fin Car" might be quite rare, but because
people laugh at you if you drive one, they are not worth much.
Peer appeal - Everybody wants a
"cool" car, and the fickle market surges whenever James Bond drives a
classic car, or when Jay Leno endorses a restored classic vehicle.
Original value - a car that was
once hugely expensive has more market appeal than a moderate car, and
the classic Rolls Royce or Ferrari cars are excellent examples of cars
that tend to appreciate.
Lesser tier expensive cars (Mercedes, BMW) also tend to hold value more
than non-luxury automobiles.
So, how do we
know what cars will be "hot" ten years from now?
The answer is not clear cut! Let-s start by taking a closer look at the dynamics of
depreciation, appreciation and the time value of money.
classic car depreciation
When buying a
classic car as an investment, it's important to understand the 1/x
This math whiz
has developed an equation that claims to accurately determine the
depreciated value of a car, an exponential equation:
V = (intitial_cost)e- 0.18645t
initial_cost = new showroom price in dollars
t = age of car in years
As a rule of thumb, any investment car that is at least
15 years is likely to be "fully depreciated" and ready to appreciate if the
conditions are right!
costs and the time value of money
When factoring-in the investment for a classic car we
also have to factor-in the time value of money.
If I buy a classic car for $20,000 and sell it 15 years
later for $40,000, how much "real" money have I made?
The answer may surprise you.
Since interest rates suck right now, a 5% rate of
return is not exorbitant, such that a $20,000 investment should appreciate
by 5% each year.
The Rule of 72
The "Rule of 72" is a great rule "of-thumb to mentally
calculate the time value of money.
It states that an investment will double as a function of 72:
Years to double your investment = 72 / Interest Rate
In our simple example, at 5% opportunity costs, it
takes 15 years to double our money.
Hence, we must always take into account the opportunity
cost of money when predicting the future profit from the sale of a rare or
classic car. When
investing in a classic car there are several rules:
your investment - Keep the car original and garaged to protect the
you like - Don't invest in an AMC Pacer just because you think that
it will appreciate.
your opportunity costs - In a market where interest rates are low
and investments risks are high, buying commodities like classic cars may
be a good idea.
expert - Don't skimp.
Pay a local expert (like
Investment in Raleigh) to do a "bumper-to-bumper" health check
before you buy any investment car.
While nobody can claim to have all of the answers, it
is clear that 2009 is a good time to invest in antique and classic