There have been several articles in the site about pretty much every single aspect of LEGO Investing: from how to store your sets to some of the "Hazzards", as Quacs explained in his blog article However, there are some other factors we all need to consider when we decide to enter this particular way of investment: the costs.
I know it sounds pretty obvious, but I strongly believe that a lot of people even in this same forum, are not thoroughly consider all the costs they are incurring at the different levels of the investing process. Even though I know some of the investors out there are not as serious as some others about LEGO investing, I believe that it is extremely important for everyone to keep track of exactly how much money each set they are purchasing is costing them once everything is added. It is not just MSRP and taxes, there are gas costs, storage, wear and tear of the vehicle (if you purchase in store), insurance cost and, very important, opportunity costs.
For a relatively small investor, each of this costs can represent a significant reduction in their profit margins once you take into account all of the selling fees added by the various outlets like eBay and Bricklink. It is less of a problem for high volume sellers, as some of the fixed costs of a particular purchase trip (gas, tire usage) get spread out over the more sets that investor purchases vs. the 2 or 3 the small investor could afford. Still, someone who moves such high volume usually has his/her costs pretty well documented (I would hope)
In this article I will try to tackle each cost category and give you a small summary of each, so that you are aware and able to document them better when it comes time to determine your actual profits. I know most people will still do the easier Sale Price - (Price Paid + Fees), just know that, in the end, the number you get from that formula is ultimately flawed unless you consider every cost you incur.
Let's examine some of the costs categories:
Price paid for the set
Pretty self-explanatory, but a cost all the same. This would just be the price you paid for the item itself at the store, online, etc. This is one of the costs everyone will for sure account for in their profit calculations.
Selling Fees Another cost that I assume everyone takes into consideration are the selling fees the sites like eBay and BL charge for their service. This can be the single most important source of costs for LEGO investors, and while I know some previous articles have talked a lot about the multiple facets of selling in these sites I figured I would try to include some of the fees you are going to be incurring once again:
- eBay: Definitely the site with the most exposure for your items, but also the one with the most expensive fee structure. There are several other variables we would need to consider, like how Stores and Insertion fees past 50 items would affect your fees, but they are out of the scope of this article. The following is the basic fee structure most sellers here will need to deal with in the site:
- Bricklink: A lot cheaper than eBay and focused only on LEGO products. The site has just been sold, so there is hope for a more user friendly interface. Seller friendly fees, but less traffic:
- Brick Classifieds: Brickpicker's own selling platform soon to be live! It has been said that the only fees will be a small $ 1 charge per 30 day listing, so that would make it the best option out there, especially for big and expensive items. Even more, active participants in the site could be able to list several items for free.
There are some other selling platforms, but these should be the ones used by most investors as they provide the best exposure and increase selling chances.
This is a cost usually born by the buyer, either knowingly (by specifically charging for shipping) or unknowingly ("free" shipping bundled in a higher item price), but it is important for the seller to keep in mind that eBay and Paypal fees will also take this into consideration when calculating their piece of the pie.
Other than the actual transportation costs, there are several other factors related to shipping that the seller has to keep in mind:
- Packing supplies: This includes everything used by the seller both in the packing and shipping process. There are costs associated with the boxes, packing tape, paper and ink for label printing, bubble wrap and other protection items, and every single one of them will cut into your profits unless you take them into consideration when pricing and listing your item for sale.
- Trips to shipping offices: This cost will be expanded upon a little further in the article, but generally it includes gas and vehicle wear and tear.
- Time: Another factor I will explain later in a more detailed fashion, but for now it is enough to say that every second you spend shipping your products is costing you money.
Ways to save!: There are some cost cutting measures investors can take in every single one of the situations described above. Some of them include saving shipping boxes from purchase merchandise, sourcing boxes from local businesses, refilling printer cartridges instead of purchasing new ones, scheduling USPS pickups (free) or Fedex, UPS pickups (fee).
Sometimes, trade offs are needed, like say you consider your time to be very valuable and decide to purchase a label printer. This move will save you time, paper and packing tape, but will generate new costs including the purchase price of the printer and new type of paper. It is up to every investor to quantify both benefits and costs to determine if such a move is cost effective.
Deal Sourcing Expenses
This is one I am sure several people don't even consider taking into account when calculating their profits. Unless every single of your purchases is made online, there are several costs associated with driving around trying to find great deals on sets. I will list and examine some of them below, while providing you an example of the impact they might have in your bottom line.
- Gas: The most obvious of all. The drive to the several retailers will cost you money at the pump that will ultimately result in a profit reduction, whether you want to account for it or not. The actual cost will vary with you car's fuel efficiency, distance and current oil prices.
- Vehicle Wear and Tear: This particular cost is often overlooked, in my opinion, but can greatly reduce your margins. Just some of the costs included are loss of resale value, tire wear, engine wear, breaks and pretty much everything that makes your car work. These may also affect your car insurance premium.
Both gas and the several other wear and tear costs can be calculated by using AAA's Driving Costs estimates. They release a very good analysis every single year that gives you a very well done estimate about how much each mile you drive is costing you when taking into consideration most of the costs we named above.
Let's do a quick example of what 2013's edition indicates: Let's assume you drive the average 15,000 miles per year, including all your LEGO hunting drives. According to AAA analysis, the yearly cost per mile including all driving costs would be somewhere around $ 0.61. Let's say I drive 20 miles to several stores and come back home empty handed, then I would have spent around $ 12 for nothing that I would need to factor in my profit analysis in some way or another.
So, are all those "looking for clearance" trips really worth it? Let's see: (Time and taxes are not considered) (Amazon free shipping assumed)
We see that even after driving costs are accounted for, the Walmart price per unit ends up being $15 cheaper than purchasing in Amazon. However, this very simple scenario relies on several underlying assumptions that we know are not true for most investors, some are listed below.
- The scenario above assumes that the investor only drove to the Walmart and back home ONCE and was able to find those great clearance deals. What are the odds of that? very small. Most of the time we read about investors making multiple trips, sometimes very long distances, to the same stores and finding nothing or very insignificant discounts. Once you account for all those lost trips, the cost per unit purchased in stores is greatly affected. Assume that the same investor of the above scenarios made 3 previous trips hoping to find clearance deals, those three wasted trips had a cost of $ 36 in total, putting the 2 VCs at about $ 93 each. The investor is now losing money in the long run.
- I am sure a lot of people here drive way more than 20 miles looking for clearance deals at several different stores in their cities. In those cases, the results would be even worse.
Ways to save!: The single best piece of advice I can give you here is to make most of your purchases online. Sites like Amazon and eBay often have extremely good discounts on LEGO sets, and the fact that there is free shipping and no need to get in your car and drive around already saves you a lot of money in the long run.
If you are still reluctant to abandon your clearance drives, then it is extremely important that once you find a good deal you buy as many sets as you can. The more sets you buy the more spread out your costs will be. Buying just 1 or 2 sets at 30% will greatly hurt your returns long term.
Unless you have several empty rooms in your home or you only plan to get a couple dozen sets as investments, renting a storage unit will eventually become a necessity. I am sure most of us in this page have not faced that need just yet, but as our inventory grows and we generate enough money to keep increasing it, we will need to either consider renting storage space or just limit our earnings and inventory to the currently available space.
If you are interested in growing your LEGO operation by re-investing as much as your capital as possible, then the need for more space is in the horizon for you. Obviously, you will be incurring in a monthly rental cost. Furthermore, given the nature of LEGO boxes, a climate controlled unit would be a must in order to protect them from the elements and varying temperatures.
Just as a reference, a 5'x5'x8' climate controlled unit runs at about $ 50 per month at my local U-Haul. This article is not intended to be a guide to storage costs or any other cost really, just to present to you some of the different costs and give you some examples on how they can affect your earnings.
For small investors, shelving units will more than likely be only expense related to the actual storing of the sets, but still something that needs to be accounted for in your calculations. Depending on the size and quality of the shelving unit, you might end up paying anything from
Ways to save!: Not much I can really add in this section. As long as you have space in your home or at some other personal location I would suggest to just buy plastic shelving units and store there as many sets as you can fit. If you see a great deal on shelving units and you know you will continue to invest in new sets, just grab them!
Once you start managing large quantities, looking for the cheapest storing unit around you could be your only choice.
Again, something that it is often overlooked by new LEGO investors. If you are planning to invest in several dozens sets, sooner rather than later you will want to make sure your inventory is covered by insurance, especially if you live in some high risk areas (flooding, tornadoes, hurricanes, etc.). It is very easy to reach several thousand dollars in LEGO inventory in a relatively short period of time, and that is actually something you can see for yourself with some forum members. Are you willing to risk losing thousands of dollars in an effort to avoid an insurance premium?
Ed wrote a very good articleon this topic a while back, where he analyses some of the various options investors have to insure their inventory. At the end of the day, most times you will end up paying something extra in the form of insurance premiums to avoid big losses, so that is something worth considering when performing your calculations.
Ways to save!: Inquire with your homeowners insurance policy. Some companies will be willing to add your collection to the home's police for little or even no money at all, depending on your particular insurance. Document every set you own and keep good records of their market value, you will probably be updating those fairly frequently. If you own a small collection or live in an area that is not prone to many risks, you can consider avoiding insurance until it becomes a necessity. No need for me to say that you do so at your own risk, right?
This is one cost I would recommend every single investor to avoid. Unless you are able to pay your credit card balance IN FULL each month or have a promotional APR of 0$ for a while, I would not recommend anyone to use their credit card to invest in LEGO. The interest rates will eat significant amounts of your profits to the point you might be losing money without even knowing it.
Ways to save!: I understand that some credit cards offer some really nice reward programs and benefits, but as said before just pay your balance in full and avoid interest charges on your LEGO purchases. Consider getting debit cards that will give you some rewards without actually lending you money. The Target Debit Red Card is just one example, no interest and still gets you free shipping and 5% on all purchases.
I don't really have much experience in this topic, but do know that you are responsible for the income generated by your investments, and that would include LEGO. Whether you have some deductions or don't have to pay taxes for some reason or another is something you should discuss with a tax professional. Just be sure to consider these and analyze their impact on your bottom line.
We finally get to the last 2 cost categories, and probably the two I consider the most important. Whether you like to believe this or not, your time costs you money. In fact, the cost of your time is present in almost every single cost category we have described so far in this article, from listing items for sale, shipping and packing, to driving around checking for deals.
If there is a cost that is harder to account for than the rest, then this is it. There are just so many different variables that need to be considered to provide even a semi-decent hourly estimate. For example, someone who is unemployed and does absolutely nothing every day will and should value their time differently than someone who makes $ 30 an hour working at a bank. For the unemployed individual, it might make more sense to spend his time walking from store to store looking for great LEGO deals and selling them for a profit, while the well off executive will for sure be wise to spend his time on his job rather than running around looking for a $30 discount.
It is impossible for me to tell you how much your time is worth, I just don't know anything about what you do or do not do. It is up to you to figure out a way to value your time, even do it per hour just like a salary. What I DO know is that you need to account for this when evaluating the results of your investments. To put this into perspective, why do you think some people outsource their investments to "Experts"? they are just aware that instead of spending hours researching potential investments to make an extra 0.1% return is not the best way to spend their money.
Ways to save!:Know the value of your time, and make choices accordingly. Again, try to make the bulk of your purchases online, it only takes a few minutes and you forget about the item until it arrives. Also, consider using some time saving tools if you manage a large volume of items, these range from physical items like label printing devices to some other services like creating a Fedex shipping account that provides package pick up, or signing up for an online tool that makes it easier for you to deal with everything that has to do with inventory and eBay listings (Something like Auctiva or other providers) Even little things like automatic email responses and feedback will add up in the long run and put your time to its best use.
This category has a lot to do with time as well, but it goes even further. What opportunity cost means is what are you missing out on by using both your time and capital in LEGO investing.
For example, let's assume you get an overall 15% on your LEGO investments in 2013. Some of your opportunity costs involve anything that you could have used your original capital that year but did not do because you decided to invest in LEGO sets. Some can be things like a vacation, a car, college, and a bunch of other things. However, my focus is going to be more towards other investments,
The 15% in LEGO you made this year may look great on its own, but what if a passive investment like an S&P Index Fund produced a 20% result that year? then your opportunity cost would be that extra 5% you would have earned by forgetting about LEGO and going into stocks instead.
The concept of the time value of money also plays a role in this category. Keep in mind that buying a set and holding it for 2 o 3 years before actually selling it keeps you from using that same money to earn a return during that period of time.
Ways to save!: I can't think of an actual way to save in this category other than making sure you make the best decision possible with the available information. Think things through, use critical thinking and you'll reduce your chances of being disappointed with your decisions.
NOTE: If you are just going to remember one thing about this article, I suggest you choose the actual cost of driving your car for miles and miles looking for great deals that more often than not end up not being there.
LEGO investing is not a get rich quick scheme, it actually takes patience, critical thinking and LOTS of time and capital. Also, as you can see, the actual costs of investing in LEGO go way beyond what most people seem to take into consideration. It is extremely important for LEGO investors to actually take every single one of these costs into account to determine how much money they are actually making in the end. I know this can be overwhelming, and some may argue that they are only doing this to fund their personal collection or to have fun, but not evaluating the actual costs you fail to determining your real profits. As a result, you may end up not funding your personal collection at all and actually lose money in the process of "having fun".
- Beginner's Guide to Investing LEGO Style - By Quacs
- Maximizing Profits - By Eschdaddy
- Shipping Wars and LEGO - By Stephen Rockefeller
- LEGO Storage Wars - By Mos Eisley
- Insuring your LEGO Collection - By Ed Mack
- The "Hazzards" of LEGO Investing - By Quacs
- Different Strokes: Investment Strategies- By Grolim
Discounts and the Effect They Have on your Investment - By Grolim