It’s an interesting concept, quite a revolutionary one in fact. Masterworks’ main selling point is that you as an average Joe can participate in art investing, once an investment that was particularly exclusive to the uber-wealthy, by buying up fractional shares in artwork.
Quite simple, yet it changes everything about the entire industry. Is it something you should participate in, though? Sometimes, it’s a bit more than simply the return you get on the money you invest. Let’s take an honest look at whether this investing platform is right for you, shall we?
- What is Masterworks.io?
- Is there a minimum to invest in Masterworks artwork?
- How does Masterworks make their money?
- Masterworks’ track record – how have they performed so far?
- How does artwork perform in a high inflation environment?
- Does Masterworks pay auction costs?
- How are your profits taxed when you sell a piece of art?
- In conclusion: Do we recommend Masterworks.io?
What is Masterworks.io?
Masterworks.io is a company that was founded relatively recently, in 2018. It really hasn’t been around all that long all things considered. The reason you’ve probably heard of them or seen them around is because they’ve been putting a lot of money into advertising to get themselves noticed by readers like you.
As a company, their goal is to get you to invest in specially curated paintings that they’ve acquired at the counsel of in-house art experts. However, to make it easier for an average Joe like you to get in on it, they divide up the art into several pieces of ownership, made official through SEC filings. When you buy up a piece of artwork, you legally own a percentage of it. Whatever happens to it afterwards, you get to share in the profits (or lack thereof).
Prior to 2018, nothing like this has ever existed. It really brings an exclusive world usually reserved for the uber-wealthy right into the palm of your hands.
Is there a minimum to invest in Masterworks artwork?
The official answer is: $20
Whether it’s true in practice or not is a bit more complicated.
You may be asking, what’s the catch? How can a person who makes an average amount of money or less be investing in such a risky asset (and it is a risky asset, as traditionally, you’re putting your money all into the value of a single painting and betting on its future appreciation, which doesn’t always happen). Surely, the SEC has some sort of restriction on who can bet on such a risky asset. The accredited investor class is one of the typical ways that the SEC controls who can buy into an asset. Basically, only investors who have a net worth of over $1 million and/or earn income that exceeds $200K (or $300K with a spouse) can buy into an asset that is restricted to accredited investors.
You’ll be surprised (or not) to hear that Masterworks is not restricted to accredited investors.
They officially state that you can buy as little as $20 of a piece of art. Whether that’s true or not remains to be seen. If you look at the individual art pieces that they sell, it seems you actually need $10K or more to participate. Whether this is a requirement by the SEC or their own requirements, I’m not sure.
However, assuming they’ve made this their own rule, it isn’t all that surprising. First, you have to know that Masterworks isn’t selling artwork and turning a profit on them by the hundreds. In fact, they’ve only successfully sold a handful or two of artwork as of 2021. It stands to reason that perhaps, they’re requiring a minimum investment of $10K+ because they’ve got a waitlist of people who want to put money into it, and by prioritizing the bigger players first, they can secure funding for the art with as little resources as possible. For a company that’s barely starting out, this is a big deal to be able to prove the market before releasing more resources to the masses. After all, every additional employee they need to hire to expand costs real money.
How does Masterworks make their money?
In other words, what are the costs and fees to invest through Masterworks?
- 1.5% charge for annual expenses incurred by Masterworks
- 20% of any future profits made from the artwork you partially own
If you’re asking what the 1.5% charge is, exactly, it’s a charge that basically states you are responsible for covering a portion of the ordinary expenses that it takes to run Masterworks as a company. It is essentially a subsidy of sorts. As far as the 20% of future profits, that’s quite self-explanatory. If you own 1% of a $1 million painting that sells for $1.3 million, you’ve made a profit of 1% of $300K, which is equivalent to $3K. You then owe Masterworks $600 and you’re left with $2.4K in profit.
As a whole, from the sale example above, Masterworks would be raking in $60K for themselves from profits alone.
Masterworks’ track record – how have they performed so far?
It’s not secret how well Masterworks has done in terms of turning a profit. They state their performance right on their website. To summarize, here are some annualized rates of returns along with the number of days they held the artwork before turning a profit on it:
- 32% annualized rate of return (held for 378 days)
- 39% annualized rate of return (held for 532 days)
- 36% annualized rate of return (held for 354 days)
- 27% annualized rate of return (held for 604 days)
- 9% annualized rate of return (held for 631 days)
- 33% annualized rate of return (held for 791 days)
- 21% annualized rate of return (held for 638 days)
- 18% annualized rate of return (held for 672 days)
- 14% annualized rate of return (held for 845 days)
As you can see, they’ve had an average annualized rate of return of just over 25% on average, with an average holding period of less than 2 years.
How does artwork perform in a high inflation environment?
Most definitely a relevant question given the times we’re in. Masterworks likes to invest in contemporary art because this particular category of artwork has performed well in inflationary periods. The definition of contemporary artwork is any art that was produced post-1945.
The reason they like to invest in more modern art is because for older pieces of art (pre-1945), the majority of the appreciation of the value of it has already occurred, whereas in newer pieces of art, there is a better chance for the art to have more room to appreciate in value. According to their studies, contemporary art has appreciated roughly 13.5% compared to the S&P 500’s 5.5% during times of high inflation.
Does Masterworks pay auction costs?
Masterworks has to pay auction costs; they aren’t immune from it. However, the costs will be taken from your overall profit when the artwork is sold, whether that be a year or ten years later. However, Masterworks is able to negotiate a better auction fee than the industry average. The industry average hovers over 10%, while Masterworks pays 5%.
How are your profits taxed when you sell a piece of art?
A piece of art is considered a collectible, and thus will be taxed at a regular income rate, even if you’ve held on to the piece of art for more than a year. This is one of the major downsides of investing in art in general. In comparison, stocks that have been held for a year or more gets taxed at a much more favorable long-term capital gains rate, which is 15%.
In conclusion: Do we recommend Masterworks.io?
Masterworks has revolutionized buying art and made it available to the masses. We commend that. They’ve also leveraged the use of technology and have built quite the professionally handled company. However, whether it is something you should participate in is a bit more complicated. The company has only been around for a few years and only has a few sales under their belt. With more time and experience, especially in this inflationary market, we’ll start to see how they do compared to the stock market. They very well may come out ahead.
But even if they do, it doesn’t necessarily mean that anyone can really participate in this rich person hobby of collecting art. The average Joe doesn’t have $10k or more to risk on such a risky asset. While we do acknowledge that Masterworks states you can invest as little as $20, we’ve yet to hear from anyone that’s actually been able to invest any less than $10k.
We’ll keep a watchful eye and give it a few more years to solidify our opinion. In the meantime, we hope that Masterworks does succeed in its endeavors, because frankly, if the business model gets proven over time, it truly could be a form of democratized art investing for the common person who simply wants to invest a well-earned $20 into it and nothing more.