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Classic car investing tips

Independent investment tips for the professional at Leisure

February 2009

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 value

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.

Understanding classic car depreciation

When buying a classic car as an investment, it's important to understand the 1/x depreciation curve.

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}

Where

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!

Opportunity 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:

Protect your investment - Keep the car original and garaged to protect the exterior finish.
Buy what you like - Don't invest in an AMC Pacer just because you think that it will appreciate.
Consider 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.
Use an expert - Don't skimp. Pay a local expert (like Motorcar 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 automobiles.