Sunday, February 08, 2009

Classic cars can be a good investment!

I've just invested in a classic Rolls Royce and I;m hoping that I will have a fun car to drive which will actually appreciate in value!

Investment cars are fun!

But what are the dynamics of using classic cars as an investment?

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!

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.

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, a 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.

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.

For more details on invbesting in antique cars, see my full notes on how to invest in classic cars.