The rise of Masterworks.io, a platform that allows anyone to own pieces of hopefully high quality artwork, is bringing the world of art investing out of the exclusive realm of the ultrawealthy and into the reach of ordinary people with a few dollars to invest. The idea of owning a Picasso may be pretty appealing to many people (including me) but is fine art a great alternative investment for us?
I’m going to compare crowdfunded investment grade fine art to investment grade real estate, an “alternative” asset class I’ve spent my life working with, which can also be crowdfunded.
Uniqueness and Scarcity
Masterworks offers unique and scarce fine art. No more genuine Picassos or Dutch Masters will ever be created because the artists are all dead. Of course you could buy works of a living artist, but even than any artist is only going to be able to create a finite amount of original art. Uniqueness and scarcity tends to drive values up over time, so long as the investment is also in demand.
Real Estate is also generally considered unique and scarce. No two pieces of land are exactly the same (though arguably two adjoining lots or condos may be interchangeably and functionally equivalent). Similarly there is no new land being created (with rare exceptions like Dubai’s island projects). As we graduate to ICI (Industrial/Commercial/Institutional) tenant occupied real estate the uniqueness gets more pronounced. There is no other building just like the Colton-Fax Building in downtown Vernon BC – a wooden heritage with an interesting tenant mix.
Utility of Artwork and Real Estate
Artwork primarily exists to bring pleasure or otherwise evoke emotion in the viewer. Buying a piece of fine art should bring pride of ownership and perhaps bragging rights to the buyer. You can point at it and say “that’s my painting!”
The utility of investment grade Real Estate is significantly different than artwork. Real estate provides shelter and/or a place to conduct business, both necessities rather than aesthetics. However, like fine art, quality investment grade Real Estate also brings significant pleasure to its owners. There is real pride of ownership in well managed property and you can point at it and say “that’s my building!”
Cost of Ownership & Revenue Potential
Owning expensive artwork means insurance, security costs and maintenance. These ownership costs exist for real estate too, plus property taxes and other ownership costs, but the revenue investment real estate can generate offsets the costs of ownership.
Fine art that is out of copyright has essentially zero opportunity to generate revenue. Perhaps you might set up a museum and charge admission but you likely need many hundreds of millions in art plus a building and staff for that plan to work, and even than museums seek donations to stay open.
Meanwhile investment grade real estate is usually rented out for revenue while development properties can be broken into smaller pieces for sale.
Opportunity to Add Value vs Hype
A real estate owner can do many things to add value to almost any property. You might build, renovate, rezone and change the use, improve the tenant mix, raise rents and more. While property owners can’t control the broad market, they can impact the value of their property directly in many ways.
Other than perhaps commissioning highly specialized cleaning and restoration work, there is nothing owners of fine art can do to add value to a painting. It’s worse than that though! Professional art dealers can and do manipulate the value of certain classes of fine art though hype but unless you already really understand that game and are the one doing the hyping, you are undoubtedly on the losing end of the hype and manipulation. To a point, some real estate development projects can also be hyped but in an established market with many buyers and sellers, investment grade real estate is just not going to see price manipulation through hype.
Efficient Markets vs Inefficient Markets
The kinds of real estate you, or better yet your experienced General Partner, buys should be located in high demand markets with plenty of buyers, sellers, lenders, tenants and transactions. An active market ensures you get fair value when you buy, sell, or accept tenants into the property. An entire industry of real estate appraisers make a living confirming values. Lenders are willing to loan 65% to in some cases close to 100% of value because the real estate market is so predictable and efficient. Seeing an investment property go for 10% above or below estimated appraised value is rare, and the variance can usually be explained by some extenuating circumstances with the buyer, seller, property or attached financing.
There are art appraisers as well, but they practice more of an “art” than the near science of real estate appraisal. Read up on some art auctions. Paintings routinely sell for many multiples below or above “appraised” value. Art auctions are a total crap shoot because the values are all about perceptions of value together with the tastes and size of the pockets of the people who show up to bid.
Are You Experienced Enough to Invest?
If you decide to wade into fine art, and you have tons of free cash, go have fun! As long as you buy what gives you pleasure and you don’t care about the money, enjoy!
However, if you are in the accumulation stage of your wealth building journey and you want a good opportunity to profit from your investments, I seriously question the wisdom of “investing” in Masterworks.io syndicated art work. You are buying into an asset you most likely don’t understand well. Since you can’t take possession of, or even visit your painting, you loose the main traditional benefits of holding fine art. Art is an inefficient market with notoriously imprecise valuations. Further, fine art is an asset no one can really add value to, and which generates zero income, while it costs money to store and insure the art.
Essentially you are relying on the expertise of Masterworks.io on the purchase, maintenance and sale plus the hope and a prayer that some person/entity will want to pay even more than Masterworks.io thought appropriate for that piece of unique art. It is pure speculation couched as an investment.
Real Estate as an Alternative Investment
Instead you can invest in a syndicated real estate deal with a General Partner you can easily talk to, vet, and have confidence in. You can visit the properties you invest in, walk the neighborhood, and follow city happenings online. For example, if you were one of the more than 1,000 investors in the Colton-Fox building Rogers Management Group syndicated you can shop the Vernon art store, enjoy yummy samosas in Vernon, or get your leather jacket repaired in the property you own a piece of.
It does not take much experience to figure out if a piece of real estate is in a good location and in good shape (or that an improvement plan is in order). Anyone can roughly figure out what the approximate correct value of a building is, or rely on the efficient market and an experienced General Partner to tell them.
What you, as an investor, likely can’t do is be constantly searching out the best real estate opportunities, negotiating the deals and arranging financing, executing the business plan for improvement and than exiting the property for maximum value. That’s the art and magic Rogers Management Group brings to the equation. Further, a good General Partner is compensated mostly based on the success the investors experience. The GP only profits when the Limited Partners profit well.
Buy your art for enjoyment, but put your investment dollars in the solid ground of quality real estate.
