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How to Invest in Fine Art Online: 5 Things To Look for Before Buying

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In the past, art has always been treated as collectible. But that's changed, and people are increasingly looking at it as an alternative investment. But like any other online investment, art comes with its fair share of challenges, most of them revolving around choosing the ideal investment method and picking the right works of art to invest in. 

Here’s how to invest in art online in 2021:

  1. Buy into art funds.
  2. Buy art shares.
  3. Participate in art-backed loans.

Here’s 5 things to look for before buying:

  1. Partial ownership
  2. Liquidity
  3. Upside potential
  4. Investment costs
  5. Provenance

Read on to learn more about the various ways to invest in art online and the most critical considerations when picking art investments.

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Masterworks allows you to purchase shares in great masterpieces from artists like Pablo Picasso, Claude Monet, Andy Warhol, and more.

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Minimum Investment: $1000 @ $20 per share x 50 shares

Fees: 10% buy-in fee; 1.5% yearly management fee

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1. Buy Into Art Funds

If you don't have the time or money to go around collecting artworks, you can keep things purely digital by investing in art funds. Art funds work pretty much like any other investment fund, except they invest in art and not securities. 

They're professionally managed and generate returns by buying and selling art for a profit. And like other investment funds, they, too, charge management fees for their services. 

With art funds, an investor doesn't even have to get their hands on the actual work of art they're investing in. The fund management team handles everything, from sourcing the artworks to the selling process.

So if you're looking for a way to invest in art without having to attend art fairs and auctions, this is one of them.

Here are a few examples of art funds: 

  • Anthea: This is a traditional art fund, but it is more focused on contemporary and post-war art.
  • Artemundi Global Fund: This fund is popular for allowing investors to take turns displaying some of the artworks under the fund’s management.
  • The Fine Art Fund Group: This juggernaut fund comprises four unregulated funds, and it boasts over $100 million in assets under management.

2. Buy Art Shares

Another way to invest in art online is to buy art shares. Wait, art shares? Yeah, you read that right. Platforms like Masterworks and Yieldstreet have successfully securitized artworks, allowing investors to own shares of a particular piece of art. 

Let's use Masterwork's model to demonstrate the securitization of artworks. 

It all starts with Masterworks sourcing blue-chip art from various auctions. Typically, blue-chip art is super expensive, limiting the number of people who can afford a whole piece.

To get around this hurdle, an LLC issuer is created for each piece.  The LLC moves to issue ordinary shares under SEC regulation, allowing several investors to purchase ownership stakes of that particular piece. 

3. Participate in Art-Backed Loans

This is probably the most unorthodox way to invest in art online. To invest this way, you start by finding a specialty lender who offers art-backed loans. Most commonly, these loans are issues to art collectors. 

Once you find such a lender, you propose to buy participation in the loans they issue. If your proposal is approved, you'll be in line to receive interest from the loan. 

You can even take it a notch higher by investing in a portfolio of art-backed loans. Yieldstreet offers such an opportunity with a portfolio of twelve art-backed loans. 

Each of the loans featured in the portfolio is backed by a distinguished collateral pool of blue-chip art from top-performing artists like Andy Warhol, Roy Lichtenstein, and more. 

How to Invest in Art Online

The most widely known method of investing in art online involves using the internet to source physical artworks, holding onto them, and hopefully reselling at a profit. 

That works for some people, but traveling around the country/world collecting art doesn't appeal to every investor. If you're wondering whether there are other ways to invest in art online, the answer is yes.

5 Things to Look For When Investing in Art Online

Not every piece of art represents a great investment opportunity. The most worthwhile art investments are not just profitable, but they also address the common challenges investors face when trying to make money online by trading art pieces. 

Some of these challenges include: 

  • Financial barriers to entry, such as prohibitive capital requirements.
  • Investment costs 
  • Liquidity risk 
  • Provenance risk 

How do you choose an art investment that ticks all of these boxes? Here's what to look for.

1. Partial Ownership

Any art piece with a great upside potential costs a fortune. So to own a piece, you need to have a substantial amount of money set aside. That's why capital remains one of the biggest barriers to entry for aspiring digital art investors. 

When you don't have enough money, you need to get creative when choosing the types of art to invest in. 

And by creative, I don't mean going for the lowest-priced art piece you can find. More often than not, these are too common to have any substantial value and appreciation potential or are in-genuine/duplicates of the original artist's work. 

Instead, I mean finding a way to own pieces of art with great appreciation potential without having to pay the full price. Fractional investing can be one way to achieve that. 

Fractional art investing is pretty simple. 

Investors pool funds together to purchase premium artworks that they might not be able to afford individually. Each individual's contribution represents their ownership stake in the artwork and is used to allocate proceeds from the sale of the piece of art. 

The rationale is that expensive art appreciates faster and by a larger margin than cheap art. 

So by pooling funds together, investors gain exposure to the upside potential of such artworks without having to fork out the full price. 

That's why it makes a lot of sense to consider the possibility of partial ownership when selecting online art investment opportunities. Thanks to modern technology and innovative business models, finding such opportunities is all about knowing where to look. 

One particular platform you'll want to check out is Masterworks. With this platform, you can invest in artworks worth as much as a million dollars with as little as $20, as there's no investment minimum.

2. Liquidity

Considering liquidity when choosing online art investment opportunities makes it easier to sell when you need to. Artworks are some of the most illiquid assets, especially if you invest in whole pieces instead of fractions. 

One of the ways to make your art investment more liquid is to choose shares over whole art pieces. 

Due to the typically high prices of premium artworks, it can be hard to find a buyer for a whole piece when you need to cash out quickly. It's easier to find a buyer for art shares because they cost a fraction of the full price. 

The other part of adding liquidity to your art investment has to do with the platform you use. On some platforms, you may be allowed to sell your position to a third party. 

Art Share Sales is a perfect example. 

If you own shares on Art Share Sales and can't wait for the sale to materialize, you can relinquish your position to another investor. What's more, you don't necessarily need to find the buyer within the platform, which can be pretty restrictive at times.

3. Upside Potential

Evaluating the upside potential of art is way different from other investments like bonds and stocks. 

While you can study a company's financials to understand which stocks represent a good investment and which don't, you can't exactly look at some document about a work of art to determine its appreciation potential. 

So, how do you identify artworks that are likely to appreciate by a significant margin? Picking blue-chip art is a great place to start. Blue-chip artworks are created by the most reputable artists with a stellar record of exceptional sales volumes over an extended period. 

Examples of such artists include: 

  • Pablo Picasso 
  • Mark Rothko 
  • Jeff Koons 
  • Jean-Michel Basquiat 

Think of blue-chip art as the equivalent of blue-chip stocks, but with a greater upside potential since blue-chip companies have already hit the maturity stage and have limited room for growth.

By picking blue-chip art, you invest in some of the most valuable artworks whose value is expected to grow, or at the very least, remain constant regardless of economic conditions. More often than not, these artworks appreciate instead of maintaining their value. 

To paint a clearer picture of blue-chip art's upside potential, let's compare its performance to stocks of the most prominent companies in the US. The easiest way to do that is to compare the performance of the S&P 500 to a similar art market index, the Artprice 100. 

As an FYI, the Artprice 100 is a portfolio consisting of artworks from the top 100 blue-chip artists. 

Artprice 100 has consistently outperformed the S&P 500 since the year 2000. If past performance is anything to go by, it's safe to say that sourcing your art investments from blue-chip artists featured in the Artprice 100 is a great start as far as upside potential goes. 

Another way to find artworks with a high likelihood of appreciating is to buy from soon-to-be blue-chip artists. The problem with taking this route is that it increases your overall risk because you can easily bet on the wrong artist. 

It's also worth noting that you'll need to physically interact with the artist's work to perform "quality assessment." 

To make things easier and less risky, consider hiring an art appraiser. These art specialists have way better judgment than the average investor and can be an invaluable resource when you're looking to discover the next big artist before everyone else.

4. Investment Costs

Whether you're investing by sourcing artworks over the internet or through art shares, funds, and loans, you need to understand the costs attached to your investment thoroughly. 

When sourcing artworks over the internet, you'll be looking at several costs. First on that list are storage charges. Unless you already have a space to store your artworks as you wait for their value to increase, you'll need to pay a storage facility to keep your investment in good shape. 

Typically, such facilities charge between $5 and $15 per sq ft (0.09 sq m). 

The other costs include transportation costs, maintenance, and potentially insurance. These can be tricky to estimate because they vary with your proximity to where you're sourcing the art, its conservation complexities, and your insurer. 

Art share trading platforms and art funds come with a shorter list of costs. Most charge a flat-rate commission on your profits. 

Others add annual management fees on top of the commission charges. Either way, you know what to expect in terms of the investment costs because these rates are usually well articulated to investors. 

Art-backed loans have the lowest investment costs attached to them. 

That's because when you purchase participation in such a loan, you're not liable for loan servicing fees and expenses. Neither are you required to shoulder the costs involved in evaluating, storing, or seizing and selling the collateral artwork if the borrower defaults on such a loan. 

With that said, you may be looking at management fees and an annual flat fee. For instance, Yeildstreet's portfolio of art-backed loans comes with the following costs, as of 2021: 

  • First-year expense: $100 
  • Annual flat expense: $30 
  • Management fees: 1% 

Make sure to research these costs when you’re ready to invest, as they might change.

5. Provenance

Last on the list of what to look for before buying any piece of art online is provenance. 

Provenance is the history of ownership of any work of art. Establishing it is one of the most effective ways to gauge authenticity because it helps you determine whether the work of art you're looking to invest in was stolen or forged. 

Remember, while an authentic piece of art can have a multi-million price tag, forged replicas of the same work can be almost worthless. That applies even if the replica is virtually indistinguishable from the original piece, and is why provenance risk remains one of the biggest challenges investors face in art transactions. 

To mitigate provenance risk, you'll want to look for documents that demonstrate the ownership history of the artwork you want to invest in. 

Such documents include: 

  • Bills of sale 
  • Receipts and invoices 
  • Previous appraisals 
  • Museum/art gallery exhibition catalogs 
  • Contemporary descriptions 
  • Auction sale catalogs 

If ownership gaps exist, see if you can find the artwork in the artist's catalog raisonné:

  1. Head over to the International Foundation for Art Research's catalogs raisonnés page.
  2. Plugin the necessary info.
  3. Hit "Go." 

If nothing shows up, the artwork you're looking to buy is probably fake. 

Another way to check for authenticity when ownership gaps exist is to look for the artist's signature. Most artists put one on every piece they create, sometimes accompanied by a date, stamp, or label. 

Be careful, though, because some signatures can be faked.

Final Thoughts

There you have several ways to invest in art and what to look for before buying. Evidently, research is critical to success when investing in art. 

So take your time to understand the art you're buying and the platform you're using to invest. 

If you're not an informed art enthusiast but still want to benefit from this alternative investment, I strongly suggest enlisting the help of an expert. That's particularly important if you're not investing through professionally managed art funds.

Masterworks

Get exposure to an uncommon asset class by purchasing shares in famous artwork with reasonable returns. Masterworks allows anyone to purchase and trade shares in iconic artworks, by artists like Monet, Warhol, and Picasso.

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