Investing in art isn't the same as investing in traditional options like real estate, bonds, and shares. It's an alternative investment that may or may not be suitable for every investor's portfolio. However, if it's suited to your portfolio, it can go on to become an investment you'll be proud of.
In this comprehensive guide, you will get to know everything you need to about buying art. From the risks involved to the factors to consider to investment tips and more - we will cover it all here. So, read on and awaken the art investor within you.
The risks of investing in art
Every financial investment comes with its fair share of risks. However, when it comes to art and collectibles, the risks are greater. Some of the biggest risks you will run if you invest in art include:
- High upfront and maintenance costs: The sensational stories of cheap art pieces being sold for millions may tempt a prospective art investor. However, the fact is that these stories are few and far between. In most cases, investors have to invest in valuable items to have any possibility of seeing returns. Additionally, art and collectibles need to be maintained if they are to have any chance at value appreciation, and art maintenance can be an expensive affair.
- Potential for destruction: If you store your art and collectibles at home and your home experiences natural and/or man-made disasters, your investments may be destroyed.
- Counterfeits: The art and collectible market are full of counterfeits. For someone new to buying art, it can be hard to tell the real from the fake.
- Scarcity of information: Investing in traditional investments is relatively easier compared to investing in art and collectibles. This is due to the wealth of information available on traditional investments. While this doesn't mean you will not find any information at all on art and collectibles, the fact is the information is likely to be scarce.
- Taxes: If your art experiences value appreciation, you will have to shell out 28% of what you earn from its sale as capital gains tax. Last but not least, there are no payments for investments in arts, i.e. until you sell the investments.
Things to look out for before investing in art
Prior to art investment, you should know about the types of art available in the art and collectibles market. Originals, prints, giclee, and reproduction - these are the most common types.
Original art pieces are the most expensive of the lot, but that's down to their authenticity. If high resale value is your priority, there is no doubt about it - originals are the way to go. 'Blue chip' art, i.e. art that already has a high market value, tends to be the most valuable type of original art. Some of the recent examples of blue chip art being sold for incredible sums of money include:
- Untitled by Jean-Michel Basquiat (1982), which generated more than $110 million in 2017
- Game Changer by Banksy, which generated $23 million in 2021
- Silver Car Crash (Double Disaster) by Andy Warhol, which generated $105 million in 2013
Prints are the originals' copies. While they can be valuable, usually, they are much more affordable than original art pieces. However, their affordability comes at a cost - their resale values are nowhere near what originals would fetch you.
Giclee prints offer more quality compared to regular prints. As a result, their pricing is on the higher side compared to regular prints, but not as high as original pieces. Also, the majority of giclee prints come with authenticity certificates. Both regular and giclee prints are made on limited runs.
Reproduction pieces, despite being originals' copies, are not made on limited runs like regular and giclee prints. As a result, they make for the most affordable art investment. Unfortunately, though, their values rarely appreciate over time.
Understanding art marketplaces
The art market is categorized into:
- The primary art market
- The secondary art market
In the primary art market, art is sold for the first time. On the other hand, in the secondary market, art is resold.
Typically, the primary art market involves the buying and selling of art pieces directly from the studio of the artist. Art fairs and galleries are examples of primary art markets, while auction houses are secondary markets.
However, there's no rule that compels art fairs and galleries to be primary markets and auction houses to be secondary markets. As a result, you may come across art previously bought and sold at art fairs and galleries. You may also encounter art that's never been sold before at an auction house.
If you plan on buying art from auction houses, it's important to understand the concept of the hammer price. Quite simply, it's the selling price of the art. However, in auction house settings, investors typically have to shell out a premium as well, which can be up to 30% of the hammer price.
At art fairs, you will have the opportunity of purchasing directly from artists. If you consider yourself a patron of the arts, you should prioritize art fairs over galleries and auction houses.
Nowadays, there is the option of investing in digital art as well. Digital art and collectibles are sold as non-fungible tokens or NFTs. In 2021, the global NFT market was valued at a whopping $4.36 billion. Some of the most popular NFT marketplaces include the likes of OpenSea, SuperRare, and MakersPlace.
The best art investment tips
In this section, you will get to know some of the top art investment tips. Putting the following tips into practice can go a long way toward ensuring calculated and wise art investments:
- Consider fractional art investing: Fractional art investing works similar to fractional investing in public markets. It involves investing in a fraction of an asset instead of the entire asset. Historically, the art market, despite its mammoth size (estimated at around $65.1 billion in 2021), has been dominated by ultra-rich investors. However, fractionalization increases accessibility to the market for more modest investors. Fractional art investing, despite being financially less risky compared to investing in a whole asset, still carries risks.
- Explore art created by emerging artists: Art created by the most well-established artists is bound to cost a fortune. While the best and most well-known artists' work stands the best chance in terms of value appreciation, it's often too expensive (sometimes even for the ultra-rich). A more affordable approach would be to explore the works of emerging artists. Even the best artwork from new artists is affordable compared to work of established artists. The best practices for knowing more about new artists include reading art reviews and visiting art galleries regularly.
- Consult an art appraiser: If you have no prior knowledge of the art market, your initial days of market research can be overwhelming. The ideal way for you not to get overwhelmed by it all is to reach out to a reputed art appraiser for a consultation. It's an art appraiser's job to keep in touch with everything that's happening in the art market. For a small fee, the art appraiser will share expertise and knowledge with you. Additionally, art appraisers can help you tell real art from counterfeit copycats. They would also be able to tell the fair value of an art piece you might be interested to invest in.
- Have clear goals in place: If your plan of buying art is about portfolio diversification, you should set clear goals and more importantly, stick to them. For instance, if your investment portfolio is $30,000 and you want to use 10% of it for investing in art, your budget would amount to $3,000. It's best not to overstep the mark. For example, if you see an art piece that you like valued at around $5,000, don't spend more than $3,000. In this scenario, explore the possibility of fractional art investing. If it isn't possible, it's best to look for something else within your budget.
- Practice the virtue of patience: Last but not least, you should be patient. It's important to remember that the value of art appreciates slowly and steadily. Some investors often have to wait more than a decade for significant appreciation, following which they feel confident about reselling art. Also, if you believe that you would need access to money in the near future for some reason, don't make the mistake of investing it in art.
- Sell when the time is right: For beginner art investors, it can be hard to tell when the time is right to sell art. Most art investors have learned the art of selling/reselling at the right time the hard way. Many have had to lose money as well, and it is experience and sound judgment that will help you more than anything else.
If you are new to the art market, we believe fractional investing through a platform like Encrypt Ventures gives you great access to verified blue chip art without the risk of purchasing entire artworks on your own. So, that is about it for this article. Hopefully, after going through all the tips, considerations, and risks, you will be ready to start investing in art. We wish you all the luck in your art investment endeavors and hope your investments will one day give you sizeable returns. All the best!