MoneyMagpie

Mar 31

How to make money investing in art

Over the past couple of years, art, particularly fine art (paintings basically), has performed better than many other investments, partly because of the amount of money that foreign investors have been putting into the market. This has attracted new people to start buying art for the first time.

So if you are thinking of investing in art for the first time, where do you start? Here’s our guide to doing it well!

Why invest in art?

Art has in recent years been performing better than many other investments and giving very good returns. Analysis of art auction statistics would suggest that you could be getting an annual 10% return.

There has also been seen a trend whereby the art market booms as the economy struggles. This was true of 2010-2012 as other financial investments were considered risky and the euro was considered unsafe, and so a lot of capital was invested into the art market, giving great returns.

Of course the downside is that once the economy begins to recover capital will leave the art market and go back into other financial investments. But for an investor, if art investment makes up, say, 2-5% of your investment portfolio then you have something of a safety net in times of economic turmoil as capital will once again go back into art.

Art is also a unique investment because, unlike stocks and shares, it is tangible and you are able to hang it on your wall and get enjoyment from it every day that it is there (this is why it is often recommended that you buy something that you find aesthetically pleasing as well as one you think will make money.)

Art is also portable which makes it very attractive to those living in unstable economies.

Equally there are a number of tax advantages to buying and selling art – paintings come under chattels taxing so sales below £6,000 are tax free.

You can also use your annual capital gains tax of £10,900 (£21,800 per couple) against the sale of paintings.

Art can even be used as part of inheritance tax planning. Many parents and grandparents are now buying paintings as a gift to their children or grandchildren. If you’re alive for seven years after giving a painting to your children as a gift, it is free of inheritance tax when you die. For more ideas on how to pay less tax read our article here.

 

How to begin investing in art?

Looking at art with the intent to invest when you don’t know much about the art market can be very daunting. There’s no easy way to know which kind of art to choose but here’s a few ways to begin making a decision.

Entrepreneur-turned-art-dealer and gallery owner, Bill Clark – of Clark Art Gallery, in Cheshire and London – has been investing in art for a few years. He specialises in the work of L.S. Lowry and has paintings he bought 10 years ago that are now worth six or seven times what he paid for them.

He says that firstly, it’s a good idea to invest in fine art because that’s the kind of art most likely to give you a good return for your money. Sculptures and installation art tend not to receive the big returns that can be witnessed in the selling of fine art paintings.

You will also need to consider what kind of fine art you want to invest in. Old masters (a European piece painted before 1800) have proved themselves to be a very stable investment over the last ten years, although they are now very expensive to purchase.

Don’t rule out contemporary art however, as some of the biggest returns are happening with contemporary pieces. It really can be worth investing in the work of modern up and coming artists who are on the point of becoming better known and appreciated.

The Clark Art Gallery, for example, often hold exhibitions of up and coming artists. Contemporary works from up and comers are likely to be more affordable and can often be bought for less than £1,000. Click here for some examples of emerging art you can buy. However the market is much more volatile and less stable than with old masters. For example, in 2008 contemporary art fell 50% in value. For this reason art dealers often recommend that you buy a range of art pieces to reduce the severity of any losses.

Jasmine says...

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Make sure you only buy pieces you love. That way you will always win, even if the price of your art goes down as you will have had the joy of looking at it in your home for all those years

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When buying you should probably buy art that you find appealing; after all, it is probably going to spend years on one of your walls. In fact that is one of the joys of investing in art. However don’t get carried away, if you’re buying for investment, it’s best to buy typical works by well known artists rather than risk buying a piece just because you love it.  A lot of the value in a work of art can rest on the popularity of the subject. If you rely solely on your own taste you may have difficulty selling when the time comes to get a return on your investment.

And don’t forget, collectors like their art to be of high quality and in ‘good-to-excellent’ condition. Never be tempted to buy soiled, damaged or ‘tired’ looking works because they are selling cheap, even if it’s the work of a famous painter. It may well cost you a fortune to have them restored. By the time you have had them reframed or mended and paid other costs, such as insurance and transport, you could end up making a loss.

Also, don’t buy a ‘lesser work’ just because it has a famous signature. Lots of artists over the years have produced limited editions which are multiple printed reproductions of genuine work. These may have genuine signatures but this will not necessarily give them much value.  These ‘lesser works’ also include sketches, pencil drawings and working drawings. Very famous artists, like L S Lowry, can achieve very high prices for simple sketches but many other names you may recognise might not. It is always much better to buy fewer high quality works. Quality will always sell.

Before deciding what kind of fine art you want to invest in, do your research. Remember the value of art can go down as well as up. It all depends on fashion, availability and the artist’s popularity. This applies particularly to the work of living artists. If they go through a very productive spell and ‘flood the market’, prices can suffer.   You need to know what the market is doing. If you go on the internet you can find auction records and sales information about well-known artists. See how the trends have been moving and don’t buy the work of an artist whose prices are ‘on the slide’.  They may take a few years to bounce back to their peak.

Once you have decided on what art you would like to invest in you should contact a reputable art dealer who specialises in that kind of art. The art dealer will work on your behalf to help source the art (you only need the one art dealer however, otherwise your dealers will be working against each other and pushing the price up!) Use the Mei Moses Index to analyse the financial returns of the art market.

 

Can you afford to invest in art?

Investing in art can be an expensive business but it is not totally inaccessible to anyone but the super rich.

Many galleries offer payment schemes to buy paintings so you may be able to pay for a painting in a series of instalments.

Get a specialist loan

There is also the website Ownart.org.uk, which offers interest free loans of between £100-£2000, repayable in ten monthly installments, for people wanting to purchase contemporary art. It can be used for a whole variety of different pieces including drawings, paintings, sculptures and ceramics. You have to be working at least 16 hours a week or retired. You first choose what piece of art you would like to buy, and then follow these instructions to apply.

Get into Syndicate Buying

There is also what is known as ‘syndicate buying’ where collectors buy a piece of art jointly. After all, most people won’t be able to afford a £200,000 oil painting on their own! Joint buying is becoming increasingly popular but just be aware that you need to do this with people you trust and make sure you have a legal document drawn up to cover the joint purchase.

Rent your art out

Another option to make back some of the money is to rent your piece of art out once you have purchased it. Some institutions, such as banks and hotels, rent pieces of art temporarily so it is worth researching to see if there are any in your area willing to do so. Depending on the piece of art itself, you can make some pretty good money renting it out.  Just make sure the painting is insured in the case of loss or damage, preferably at the institution’s expense. It is important to remember that when you buy art your money really is tied up. Investing in art means you won’t be receiving dividends or rent, so only invest money that you won’t need soon. This is one of the reasons renting out your art might be attractive, as it provides capital before you sell the piece.

 

What to be aware of when investing in art

Fakes

Unfortunately, there are plenty of criminals out there with enough skill to fake works of art by well-known artists. The fakes might not fool an expert but can easily appear convincing to an untutored eye.  You should always ask the vendor to provide proof the work is genuine or give a guarantee of a refund if it turns out the painting was ‘made to deceive’. If you think you’ve discovered a work of art at a price you think is almost too good to be true, it’s probably a fake.  Ebay is full of ‘original works’ by ‘famous artists’. The majority are fakes and you will have little comeback on the seller if you buy them.

All genuine works of art have some kind of ‘provenance’, i.e. written records of when they were created and signed, where they were first exhibited, who owned them, where they have been since, where they have been bought and sold or why they’ve been out of the public eye. If the works were part of an inheritance, there should be a will or probate documents to prove it. Genuine art collectors know that receipts and documentation are critical in valuing a work of art.

Equally, not all art dealers are everything they seem and buying from private individuals can also be fraught with problems. You will have very little comeback if things go wrong. If you plan to buy a work from a dealer, check out their reputation in the trade, use the usual credit reference agencies and company checks to see if they are honest and genuine. Ask around. Once they’ve got your money, a dishonest dealer can make it very difficult for you to get it back if what they’ve sold you is not the sound investment you hoped for. After a few years of waiting for a work to ‘appreciate’, it is very tough to discover you were conned in the first place.  The dealer will almost certainly have disappeared, along with your investment.

 

High commission costs

Art transaction costs are considerably more pricey than other investments, and commission costs at auction can be high. When buying you can be charged commission costs of between 12.5% – 25% (+VAT) and if the artist died within the last 70 years an additional four percent artists royalty is payable. If you sell at auction you will be charged fees of 12.5% to 17.5% of the selling price plus insurance and cataloguing costs. Although there are no guarantees, if you’re celebrating because the value of something you bought a couple of years ago has increased by 20%, a robust return in monetary terms, you need to be aware of the costs if you sell at auction.

Equally, be wary of auctioneers who estimate ‘too good to be true’ returns on paintings. Research them thoroughly and ensure they have a good, trustworthy reputation before you choose to buy with them.

Exaggerated return claims

Arthur Korteweg, a finance professor at Stanford, has warned that the suggestion that you can expect to make a 10% annual return on your investment is the result of a selective use of the data. The paintings that are resold are the ones taken into account when the expected return is calculated. However for this figure to be accurate it would require that the paintings that are not sold could make a similar return and, according to the professor’s research, they often could not. In other words, those paintings that have increased in value are usually the ones that are sold, whilst those that have made smaller returns are less likely to get taken to auction. After the selection bias has been accounted for the professor estimates that an annual return of 6.5% is more likely. Read this Forbes piece for more on this.

None of this means that you shouldn’t invest in art but you need to be aware of the potential pitfalls that you may come up against as an art investor. The key is to research, know the market, be sensible with the risks you are willing to take and to buy a piece of art that you won’t mind hanging on your wall for a few years!

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