When the Term ‘Investment’ Doesn’t Fit, You May Have a Business

Well, it is Election Day here in the US, so I am going to write about … fashion. And financial writing. And personal finance. And how they all intersected in a fun article that is begging for a friendly correction.

Now and then, financial writing intersects with other general interest areas. A few years ago it was baseball cards and collectibles. Early this year, rare books got a turn. And now, clothes are in the spotlight, thanks to upstart wardrobe rental businesses.

The business model goes like this: You have nice clothes in your closet, fancy dresses that don’t get much use. You keep them because it is always good to have an event dress on hand so that you don’t need to shop for that wedding or holiday party. But they end up pushed to the back, and their cost-per-wear ratio stays high. Meanwhile, there are other people out there who need a dress for an event and don’t have the means, time or desire to buy something new. Problem, meet solution: wardrobe rental apps! List your wardrobe and rent outfits to people for an evening, like AirBNBing your closet. Your clothes turn into cash flow, people don’t need to waste money buying what they view as single-use outfits, everyone gets to feel sustainable or whatever, win-win-win.

Last week, one of the UK fashion pages profiled some ladies who have found great success renting their wardrobes. After getting plenty of hits on the pieces they already owned, they bought new dresses to rent out and now have thriving operations that keep the cash rolling in.

So far, so fun. But here is where things go a little far: The profile was full of terms like “invest” and “rate of return,” even comparing the purchasing of new clothes to rent out to investing in stocks and bonds.

This is just one example of phrasing I have seen a lot over the years. People occasionally talk of “investing” in a new television. Or a PC. Or, or, or. Friends, it is wrong and could lead you to a weird place. Hear me out.

“Invest” has a specific meaning. It means buying assets that, in theory and historically in practice, tend to appreciate in value over time so that you can sell them for more than you paid. An investment pays off when its total return—price movement plus any investment income earned along the way—exceeds the initial value. One typically undertakes this to grow one’s savings over time to fund retirement and other long-term endeavors.

Does buying clothes to rent out qualify? It is a big ask, and it doesn’t seem to quite get there. Clothes, like cars, depreciate. A cursory scroll through resale app Poshmark shows even unworn clothing with the tags still on sells for about -30% to -60% below the original retail price, depending on the brand and how classic the style is. There are some exceptions—over on TheRealReal, defunct designer brands like The Vampire’s Wife take less of a haircut—but overall, even “new with tags” doesn’t preserve full value, much less drive appreciation. Actual used clothing in “good” condition generally goes for -60% to -90% off retail, again depending on the brand, style and degree of wear.

So for buy-to-rent clothing to actually pay off and qualify as an investment, in my opinion, you would need to rent it enough times so that your rental income plus the proverbial peanuts you get when you finally sell exceeds your original purchase price. After I spot checked a few brands on wardrobe rental app By Rotation, it looks like dresses, shoes and bags typically rent for about 7.5% to 10.0% of the retail price, depending on whether the rental is three or seven days. But the app collects a 15% fee from renters, knocking the take to between about 6% and 8.5% of retail price. Assume you will get only 80% of retail when you sell, add in the $40 (or more) it can cost to dry clean a formal dress, depending on your ZIP code, and my sloppy back-of-the-envelope math suggests you would need to rent something out in the neighborhood of 13 to 20 times just to break even. Which requires the style staying current and in-demand long enough to rack up that many rentals before it becomes dated and unwanted.

And this assumes nothing goes wrong. No rips, no indelible stains, no wear and tear requiring mending, no disasters rendering the dress unwearable. It only takes one bad experience to end a garment’s rental life and destroy all remaining resale value.

To me, these are just too many ifs to qualify clothing as an investment.

But let us consider different language. These intrepid folks who are buying clothes to rent out are launching businesses. They are employing their eye for style and ability to cultivate a brand. They are buying inventory in the hope revenues eventually exceed costs. Some of those revenues get plowed back into the business, in the form of new inventory, and some get paid out to them, the business owner. Whether the business model is sound isn’t my business, but it is a business.

This all might seem like trivial griping from someone who is overly literal and a stickler for word usage. Touché. But it matters, because seeing clothing purchases described as “investments” may lead someone to think that if they are running a nice little business, they don’t need to invest, or that it is somehow an either/or proposition.

It isn’t! Do both! This isn’t a false choice between buying inventory and making personal retirement investments. By all means, get your little business up and running, shoot your shot, take that risk. And then, as you generate revenue and pay yourself, sock some away in your retirement or brokerage account and put it to work for you. This is where your actual asset appreciation, your nest egg, will come from. Everyone needs to save and invest for retirement, whether we are office grunts, quirky MarketMinder writers or kitchen-table clothing retailers.