You see the shiny, pristine classic cars crossing the auction block selling at multiples of what the car cost when it was new and you say to yourself, "I wish I would have bought a couple of those when I had the chance." Seems like another good hindsight plan that worked out perfectly…

Although everyone wishes they could profit by collecting old cars, are decade-old hunks of metal a solid investment choice in your portfolio? This article is going to dive into the expected return on classic cars, the costs to hold and maintain these cars, the fees charged when you buy/sell these cars and compare classic car investments to more traditional investments such as stock, real estate, and gold. We are also going to look at the risks of owning antique cars, and finally, if you are going to buy a classic car as a pure investment, which ones you should target for your portfolio.

Just to be clear, we are looking at a car as an investment in the same way a stock picker analyzes his next investment, a property developer takes on his next project, or a venture capital firm funds its next start-up. Forget taking the kids to the ice cream shop in the car or learning how to work on cars if you have no clue what you are doing. This is an investment from the purchase to the sale.

What type of returns can you expect?

The 1962 Ferrari 250 GT cost $18,000 when it was new. In 2013, one of the thirty-nine 250 GTO's produced sold for $521 million. This was the most expensive car ever sold.

The 1962 Ferrari returned an annualized 17% over the 51 years. This is a phenomenal rate of return over a significant period. Most hedge fund managers would kill for three years of double digit returns and this car did it over a half of century. Compare this to 1967 Chevrolet Corvette L88 Coupe sold at Barrett-Jackson sold in Scottsdale of 2014 for $3.85 million2. This car cost about $5,500 when new and only 204 were made with this option. This is a 15% annualized rate of return. Returning to reality for the rest of us, your run-of-the-mill 1967 Corvette convertible (price when new $4500) with a decent restoration averages selling around $100,0003. This works out to a 6.5% annualized return.

These returns are outstanding, but let us dig into the numbers a bit more and see if they are what they seem to be on the first glance.

Unlike a stock, bond, or even hands-off real estate investment, a classic car needs annual maintenance. From putting fuel stabilizer in the gas tank to rebuilding an engine or replacing a rusted panel, these costs add up over time. Although, it is hard to put an exact number on it, let us assign a range of 1%-3% a year on maintenance (our $100,000 Corvette would average $1,000-$3,000). These maintenance costs are tough to approximate and apply to all classic cars. A tune-up on an American classic will be far cheaper than on an Italian sports car. This is not to say that every year you should expect to put 2% of the car’s value of work into your car. Some years will be close to nothing, and other years will well exceed 2%.

Since all old cars are prone to rust, you need to store them properly. Maybe you have a ten-car garage, but let us assume you do not. Storage can run an average of $1,000 per year. A more expensive car may require pricey year round, climate-controlled storage. For our $100,000 Corvette, we will use a basic storage cost of 1%.

Insurance, compared to your daily driver, is almost laughably cheap. One of the big reasons for the lower costs is most people do not drive their classic cars on a regular basis or their insurance requires them to limit their mileage and/or only drive them to or from classic car events. We will assign insurance cost of 1% per year.

In the event you finance your classic car, you can expect to pay interest as low as 2% if you use a home equity line of credit to as high as 7% (assuming decent credit) if you get a loan with the car as collateral.

By adding all these costs up, a classic car owner is looking at annual ownership costs for our $100,000 Corvette of about 3%-5%, or $3,000-$5,000 if you pay cash for your car, or 5%-12% ($5,000-$12,000) if you finance the car.

Let us say your average annual costs work out to 6%, that 6.5% annualized return you were expecting, after carrying costs, amounts to no return on your investment.

Sale prices of cars at auction include a 5-10% buyer's premium, so a $1,000,000 posted car sale price is $910,000 to $950,000 to the seller prior to the seller's premium which can knock it down another 5-10%, or in this case, another $45,000 to $90,000. That million-dollar sale nets the only $820,000 to $905,000 in the pocket of the seller. It is acceptable to use auction prices a gauge of value, but make sure you add or subtract any notable difference in your car’s condition and quality to arrive at a value of your vehicle.

Our zero percent rate of return on our Corvette does not account for the present value of laying out cash every year and not seeing any type of return of money until the car is sold. Unfortunately, unlike stocks, which pay dividends, bonds, that pay interest, or income producing real estate, which pays rent proceeds, classic cars produce no income at all. Yes, you might get your car on the set of a movie or TV show and collect a nominal fee, but for all practical purposes, your classic car produces no income.

Here is a chart showing the returns of stocks, REITs (real estate investment trusts), bonds, and gold from 1980 until 20135:

  • Stocks: 7.8%
  • REITs: 11.5%6*
  • Corp Bonds: 6.1%
  • Gold: -.2%
  • *Only from 1985-2015

Yes, there is some time selection bias in this chart. We could have picked a different time period, but a generation of data should serve well enough to illustrate that putting money in classic cars strictly as an investment is not the best use of one’s money. Sure, you are not going to invite your buddies over to crack some cold beers and to look at your financial statement, but remember, we are using these cars as an investment and not as hobby.

In the example of our higher end cars with a 15% return, the annualized return works out to 9% without taking into account the present value calculations. Although, there is an extreme amount of luck in picking these outliers, one cannot count on having such good fortune in picking the next 9% annualized return collector car. For every 1995 Ferrari F50 that sells for around $2-3 million9 (cost when new $475,000 with a very limited production run of 3498), there are cars like the Lamborghini Jalpa. Off the showroom floor in 1988, the Jalpa cost $65,0007 (only 410 were built from 1982-1988). If you were trying to the sell the Lambo today, you would be thanking your savior if you could get over $90,000 for it.

How to increase your odds of buying the next five-fold price increase car and not just an old car that looks cool at cruise nights?

Classic cars derive their value from a myriad of factors.

The car itself:

  • Car's condition– A car in mint, or concourse, condition will bring a lot more money than a project car of the same make and model. This is one of the primary drivers of a car's value.
  • Numbers matching car10, or a car with the key component(s) original to the car, will greatly enhance the collect ability and value of the car.
  • Mileage-The lower the better.
  • Originality-Generally speaking, an original car, even in less than perfect condition will command more money than a restored car in excellent condition with reproduction or after market parts.
  • Restoration quality- a handyman restoration will usually fail to capture the value of a car restored by a professional shop.
  • Car options or model upgrades- manufacture options, usually those that were power upgrades, will result in an increased value.
  • For example, let us take a look at the 1966 Ford Mustang. Ford made 607,568 Mustangs that year12. Ford also teamed up with Hertz to make a Mustang GT350H version, commonly known as the Hertz Mustang. Ford produced 1001 of GT350H models13. A top condition GT350H sold for $137,500 in October 2016 at Mecum Auction11. A comparable condition standard Mustang from the same year might fetch $35,000-$40,000. These two cars look and feel very similar, but the rarer, GT350H, will command a higher sale price.
  • Provenance, or record of ownership history, will increase the car’s value too. Cars with detailed provenance will show that the car is authentic as well as allow you to reach out to prior owner(s) to ask questions about the car. Ownership history is very important for rare cars that are prone to forgery or other misrepresentations.
  • Tribute, kit, and replica cars are fun to look at and drive, but do not have the monetary draw that the official cars carry. Avoid these when buying a car as an investment.

Car trends

All classic cars are old, but not all old cars are classics. Specific makes and models of cars tend to be more desirable than others are. As we illustrated earlier, two very similar Italian cars had very different returns. Just like picking the Super Bowl winner during preseason is extremely difficult, so is picking a car that will trump depreciation, become a favorite among collectors and not having maintenance and carrying costs offset any capital gains when you sell is very challenging. Be it American muscle cars, Italian sports cars, English cars, German cars, or another niche within the market, all these cars have had their high points and low points over time. Trying to time if your 1950 Oldsmobile 88 is going to have a resurgence in popularity and have significant price appreciation is like trying to pick the next Facebook or Amazon stock investment.

One observation that tends to seem persistent over time is the demand for collectors based on generation age. 1950’s cars have had zero price appreciation over the last decade. One theory for this is the generation that grew up wanting to collect these cars (people born between 1930 and 1960) are now either dying off or looking to reduce to their collections. These 50’s cars peaked in value in the mid 2000’s, or when the prime collect of these cars averaged 60 years old14.

To use this theory to identify the next generation of highly sought after cars, look at the cars made in the last 30 years. However, to avoid putting yourself in a situation where you pay top dollar for a brand new car from the dealer only to put it in your garage for another 60 years, look at cars made between 15 and 30 years ago. Many of these cars are in limbo between being a typical used car and not yet a collector car. The advantage for you, the collector, is that you are buying a depreciated 'used' car and have the possibility of buying a highly sought after collectible at an extremely discounted price. The disadvantage is that there are no guarantees that the car you buy will be leading the price leader decades down the road.

Economic trends

Classic cars are really just art. As fun as they are to drive and admire, they have limited functional use due to being technically obsolete by today’s standards. This makes classic cars, as well as art, second homes, RV's, boats and other toys, the first items to be discarded when boom times come to an end.

This means that when times are good (high employment, low interest rates, easy lending, etc) there is excess money in the economy. These factors help push the price of classic cars up. However, when the economy tanks, classic cars are one of the first things people sell when money is hard to come by.

Tips on picking your classic car investment

Pick your Poison

Target cars that are 15-30 years old now. This will give you the chance to buy them near their fully depreciated price and just on the brink of becoming true classic cars. The objective here is to limit your hold time as well as reduce your downside exposure. Buying a brand new exotic car for MSRP and waiting up to a half of century gives you full monetary risk and the unfortunately reality that the car may out live you before you sell it.

As an alternative to buying older cars is purchasing brand new limited model edition cars (ie. certain makes of Porsche, Bugatti, and Ferrari). The advantage of buying new is that you are the original owner and have total control over your investment. Often times, these cars experience an immediate price jump due to their limited production meaning your car is in the black on Day 1. The downside is that you are paying retail price for a car that may never realize this price again in the secondary market. Due to the high profile companies selling these cars, there is huge competition for the small batch runs of several hundred cars, you may never get the car you want even if you camp out at the dealership on its first date of sale.

Always bring an inspector who specializes in your car. Do not bring the mechanic who changed your oil on your 2015 Civic and claims to be a classic car expert. Look for true experts on your make and model who can identify every significant part of the car and verify that it is exactly the car the seller claims it to be as well as how it should have been built in the factory. You may even have to bring in a mechanical inspector too so you can make sure the car runs as well as it is being advertised. When you are dropping more money on a car than some people spend on a house, do not cheap out on bringing in the experts. It is money well spent.

Classic car financing is extremely easy to get now days. Often times, you can buy a classic car with 10% down or less. The interest rates on these purchases are between 5-7% depending on your credit rating and salary. Generally with these loans, the vehicle itself often collateralizes the loan. Even though it may be tempting to leverage up your purchasing power, take heed that the payments will be due every month regardless if your vehicle is appreciating at the rate you expect it to.

Plan to hold the car for at least 5 years, but probably longer. Due to the high transaction costs of buying and selling a car (taxes plus consignment dealers fees or auction house fees), it is generally better to spread these costs out over a longer holding period to let the price appreciation really work for you. I know everyone dreams of flipping classic cars like those that some TV shows propagate, but reality shows that longer hold periods work out better for investors.

When you are negotiating to buy your car, feel free to walk away if the seller is not willing to accept your bid. There will always be another car for sale.

Buy more than one car. Do not buy two of the same car, but rather buy several cars from different manufactures and styles. This creates a classic car basket, much as a mutual fund does with stocks. This diversification allows you to spread your bets across several cars instead of betting your entire retirement on one vehicle.

There are always other risks when buying an investment classic.

Forgery risk15-Maybe the guy you buy from is the most honest guy in the world, but the guy he bought from made it his life’s calling to turn 1969 Camaros in to Z/28 Camaros. This is where a good inspector comes into play.

Mother nature-Hurricanes and earthquakes happen. If your prized investment is destroyed, you had better hope you have the right coverage for your car. Make sure your insurance is current and protecting your investment for the right limits.

Mechanical risk-If your numbers-matching engine seizes up beyond repair, the car's value will take the hit too. Although there are no safeguards to protect a blown engine, you should be mindful that you are driving a car where replacement parts may be unobtainable.

Buy the best condition car you can find. This means absolutely no projects and even most driver quality cars are out of the running. Buying a car that needs work means more time and money tied up in an investment that may or may not be worth the energy. How often do you see a car for sale advertised as "$75k invested, asking $50k"? Be on the receiving end of this transaction—not the giving end.

Look for special editions, limited production numbers, or otherwise rare cars. Although rarity does not guarantee price appreciation, in many cases, it helps. When you combine a popular model like the Pontiac GTO with a limited edition option, 'The Judge' (years 1969-1971) you have a car that is in high demand due to an exclusive package that was limited to only a select number of cars.

Classic cars should be a small percentage of your overall investment strategy. Given that their price functions behave more like a Picasso than a share of Microsoft stock, it behooves you to spread your investment money across many different asset classes for maximum diversification. This means stocks, bonds, real estate in addition to classic cars.

Wait for the next recession. Although this is extremely hard to time and even harder to act on when fear runs through the streets, significant price declines will occur when the economy goes south. There is not a 100% correlation between various art types and the economy but there are price pullbacks when the economy hits the skids.

Ready to start looking for your investment? Start here.

BOTTOM LINE: At Sharp Classics, we encourage car collecting for fun. However, if you are in for making money, do your homework, do not risk all your money on a single car, and minimize your downside.