A top-down approach to investing

Collectible cars are rolling pieces of art that can be both enjoyed and exhibited. And, like many other collectibles, they can also be a safe place to park longer-term capital.

Some argue they’re even better than real estate, since cars garaged in a weak market can be transported to areas where demand is stronger.

Either way, high-end vehicles—exotics, customs, classics, hot rods and resto-mods—must be considered as much for the fun of ownership as for any financial gains down the road.

“They appreciate in value and you have the pleasure of driving your investment, which you can’t do with a GIC,” says Montreal-based Howard Cohen, general manager of John Scotti Classic Cars. “A lot of people buy them for nostalgia; their father had that car or they went to their graduation ceremony in that car.”

A car with all its original components is inherently more collectible. So examine the serial numbers of major parts.

“The motor and the transmission serial numbers are the same on muscle cars, but one is stamped on the motor; the other on the transmission,” says Cohen. “Some cars have the original motor, but often the transmission has been replaced so it no longer matches.”

Hassle factor

• Unlike in the U.S., Canadian banks don’t offer loans for old cars
• A rigorous due-diligence process
• Highly correlated to economic cycles
• Collector vehicles should be stored in secure garages
• Insurance costs are high for a car you won’t drive often. Hagerty Silver Wheel Plan Premiums are $450 for $50,000 coverage
• Appraisal process is time-consuming
• Exposure to damage in public parking space

Car collecting takes time, research and patience, says Craig Jackson, chairman and CEO of Barrett-Jackson, a U.S.-based automobiles auction house noted for dealing in celebrity cars.

The rarer, the better. Some of the rarest are pre-WWII classics such as the Duesenberg and the Isotta Fraschini. But the ones owned by celebrities are pure gold.

Barrett-Jackson’s 2013 Scottsdale auction generated $109 million in gross sales. It featured the original 1966 Batmobile, which was snapped up for $4.6 million, and Clark Gable’s 1955 Mercedes-Benz 300SL Gullwing Coupe, which sold for more than $2 million.

“Owning a car [that has] style and a celebrity connection is something that resonates with collectors all over the world,” says Jackson.

In general, expensive cars appreciate better, says Dan Warrener, a classic cars specialist with RM Auctions, a Canadian enterprise with offices in North America and Europe.

“High-net-worth owners seldom have to sell, [which] means low supply and high demand,” says Warrener.

Makes that have international appeal, like Mercedes-Benz and Ferrari, are better investments because there’s a bigger market to sell to, he adds. The market’s also driven by demographics.

Typically, younger buyers prefer sports models—Mercedes 300 SL Roadsters and Gullwings, and 275 GTB/4 Ferraris—while older buyers opt for classics like Duesenbergs and pre-1940 Rolls-Royces.

For all age segments, convertibles generally pull higher prices because fewer were built compared with hardtops.

Facts and Figures

$113.7 million: Total sales realized at a 2012 auction by Gooding & Company Pebble Beach Auctions, California

$12.4 million: Fetched by a 1957 Ferrari 250 Testa Rossa at a 2009 Maranello auction in Italy

$16.3 million: Paid for another 1957 Ferrari 250 Testa Rossa, the first prototype, in 2011 in Monterey, Calif.

$11.2 million: Amount a 1960 Ferrari California Spyder was sold for at 2012 Pebble Beach Auction

$11.5 million: Amount a 1936 Mercedes-Benz 540 K Special Roadster was sold for at 2012 Pebble Beach Auction

$9.8 million: Amount paid for a 1931 Bugatti Royale Type 41 Kellner Coupe at a 1987 auction in London, England

Among baby-boom-era buyers, Detroit heyday muscle cars with big block V8 engines pull in the big bucks.

High on Cohen’s list of coveted models are Corvettes made between 1963 and 1967, Camaros from 1967 to 1969, Mustangs built any year up to 1970, Thunderbirds from 1955 to 1957 and Cutlasses built between1964 and 1970.

While these cars usually carry exclusive price tags, some aren’t out of reach. “We have customers who’ll spend $5,000 and those who’ll spend $100,000,” says Cohen, who’s personally owned 77 cars over 35 years.

“One of my customers took out a mortgage on his [fully paid-off] house to buy his dream car, an $80,000 1970 Plymouth Super Bird.”

Cohen says one should be careful not to over-borrow to invest and insists autos are buy-and-hold investments.

“The longer you keep them, the better investment they are,” he says.

In a good market a classic car can gain 5% a year. At the very top end, though, value can appreciate as much as 33%, according to Barrett-Jackson’s 2012 reports.

The market’s also highly correlated to economic cycles. “The economy can go down like it did in 2008, which creates a downside,” says Cohen.

“Guys who can’t pay their mortgages are selling their cars, because you can’t live in the car.”

And when markets get flooded, prices tumble. “All of a sudden there are 100 cars of the same type on the market instead of 10,” he says. “If you own one of those 100 cars you are going to go on lowering the price until somebody buys it.”

However, these scenarios also present opportunities. “It’s exactly like the stock market,” says Cohen. “You buy when people are selling.”

Which means right now is a good time to invest.

“We’re seeing a resurgence in the car hobby as the economy recovers and the trend is only going to continue,” Jackson says. “Collectors all around the world are feeling confident in their decisions as auction prices continue to rise.”

But Warrener cautions against losing perspective.

“A person should have net worth [in the vicinity] of $750,000, before buying a $50,000-to-$75,000 collector car,” he says. “A person shouldn’t have any more than 10%-to-15% of his net worth tied up in an old car.”