Thinking of dipping your toes into the world of art collecting?
Art can be a great investment if it's purchased in a smart way: returns vary, but according to the AMR Art 100 Index, art prices have increased at a compound annual growth rate of 8.0% over the past 25 years.
However, most new collectors don't realize there are ways to enter the market besides bidding at Christie's or walking into a gallery and plunking down a credit card.
We spoke with Erica Waldbaum and Jeremy Rhodes of New York-based art investment advisory firm Artvest to find out some alternative ways to start investing in art and turn an existing art collection into a valuable asset.
Put your money in a professionally managed art fund
Former Christie's finance director Philip Hoffman founded the Fine Art Fund
Art funds have been around for a century, but they've become a hot form of investment in recent years. They work like private investment funds: investors, usually working with an adviser, put in money, and a professional team acquires investment-grade art.
Some art funds try to get works placed in museums to improve their provenance and enhance their value. They then try to sell them for a profit, generally, in 5 to 8 years, Rhodes said. Some focus on a single medium, while others, like the well-known Fine Art Fund in London, are highly diversified.
Pros: There's a low barrier to entry, since minimum investments are often less than a single piece of art, and investors don't have to worry about the issues that accompany owning fine art, like insurance and upkeep.
Cons: Not all funds are well managed; due diligence is necessary before investing, Rhodes said. There have also been a couple of reported cases of art fund scams.
Join a private investment partnership—or start your own
Private investment partnerships are groups that pool their money to buy investment-grade art with the help of an adviser. They are smaller and more informal than art funds.
Pros: Unlike in an art fund, investors have much more of a direct say in what the group buys.
Cons: They're private, so unless you know the right people--or want to start your own group--you won't necessarily be able to join one. And unless the group has a smart adviser or a member who really knows what he's doing, there's a danger of buying a piece that will actually lose value, Waldbaum said.
Leverage your existing collection to buy more art
"Most people don't realize that just like a house, an art collection can be used as collateral for a loan," Rhodes said.
A variety of institutions, from major banks to boutique firms, will make these loans. Some boutiques will even do non-recourse loans, using just the asset as collateral, Waldbaum said. An investment adviser can help navigate the plethora of lenders out there.
Pros: A collector can make acquisitions he couldn't normally afford to make, and if the assets appreciate rapidly, he can also stand to make a big profit.
Cons: Just like any type of loan, there's some risk involved. And interest rates can be high--10% is a standard rate, although they can be as low as 4% at a private bank and up to 20% at some boutique firms.
Make irrevocable bids at auctions
Sotheby's auctioneer Adrian Biddell
In the case of an irrevocable bid, the auction house finds a bidder willing to pay a certain amount for the work, usually below the low estimate. If no one bids higher, the bidder buys the work (and pays the buyer's premium). If someone does bid higher, the person who made the irrevocable bid gets a cut.
Unlike a third-party guarantee, the "irrevocable bidder" can bid on the piece at auction, and the process is open to everyone.
Pros: It's a way to save some money, and even if you don't win the art, you'll get a small kickback.
Cons: "You have to want it because there's a good chance that no one else will bid and that you'll wind up owning it," Waldbaum said.
Consider buying works from emerging artists
If you want to start an art collection but aren't prepared to drop millions of dollars on the masters, consider investing in works by emerging artists.
"If artists are moving to higher-end galleries, it's an indication that the artist has found a new level of respect or collector base," Rhodes said.
"They have the potential to grow and become more established--it's a more affordable way to get your feet wet," Waldbaum added.
In New York, if an artist makes it into Pace Gallery, Gagosian Gallery, or David Zwirner Gallery, that's a good sign, said Rhodes.
Pros: Lower prices and huge growth potential.
Cons: There's no crystal ball, and you never know who will flop.
And from developing market sectors, like Brazil and China
Art from developing market sectors can also be a good bet for a new collector.
"A lot of people are concentrating on China, Brazil, Russia, the Middle East and India--though Artvest has observed recent slowing in some of these markets," Rhodes said. "Investors are acquiring art from those parts of the world because they expect demand to increase substantially."
Pros: As with investing in emerging artists, the payoff can be huge. Plus, you'll add some flavour to your collection.
Cons: There's always the possibility that a market will fizzle. Develop a good relationship with a dealer or adviser who can point you in the right direction.
Hold onto blue-chip art—it doesn't need to be the Mona Lisa
"A piece of auction-quality Impressionist or Modern Arthas the potential to really appreciate," Waldbaum said. "So a strong work you enjoy looking at and really believe in, is an investment that can retain value and grow."
Returns vary by genre and artist, but according to the AMR Art 100 Index, art prices have increased at a compound annual growth rate of 8.0% over the past 25 years.
Pop art has had particularly explosive growth in the past 25 years, and Russian art has also done well; however the historically robust American market art has lagged recently, Rhodes said.
Pros: There's not much risk--even a minor work by a master artist is likely to generate solid returns over time.
Cons: A piece may seem like a safe bet now, but it's impossible to know what the market will look like in a decade or two.
Hunt for off-the-radar works at regional auction houses, and sell them for a profit
For collectors with the time and expertise, geographic arbitrage --buying works at local or regional auction houses that could potentially do well with big-league auctioneers--is a great way to turn art into money.
In 2009, a Rodin sculpture purchased at a Paris auction house for $4.3 million sold 11 months later at Sotheby's for $11.8 million, according to Artvest.
Pros: Discover an off-the-radar work before anyone else, and you've found yourself a goldmine.
Cons: "It's more nuanced than going to a garage sale and bringing what you find to Sotheby's or Christie's," Waldbaum said.
The best work sells quickly, so turn up early. Charles Saatchi, the advertising magnate and art collector, sometimes arrives at shows before all the artwork is installed and rival dealers get there (he is famed for buying up entire graduation shows).
Investment experts say modern art is an effective hedge against inflation – returns tend to be better at times when prices in the economy are rising, which is the case now. When selling, anything under £6,000 is exempt from capital gains tax and further tax relief applies up to £15,000.
But unlike shares, bonds or property it does not produce an income and is not a very liquid asset – you need to be prepared to hold it for several years and may not be able to sell when you want.
Art investments are also unregulated, so you can’t fall back on the Financial Services Compensation Scheme if something goes wrong. Bear in mind too that there could be insurance and storage costs.