So we bought a boat!
Yup, we went to the Annapolis Boat Show this past October and put an order on a sailboat! This is by far the most important and meaningful step that we have taken towards our plan to one day sail around the world.
The nutshell of the story is this:
We placed an order for a new Lagoon 42 Catamaran that will be put into charter management with Dream Yacht Charter on the island of Antigua in the Caribbean. Blue Buddha, as we will name our boat, will be delivered in the fall of 2018. The long wait is due to this particular model being extremely popular. We plan on having the boat in charter management for 5 years. This means that during the next 5 years, Dream Yacht Charter will rent it out to other sailors. In exchange, the company will pay us a fixed monthly amount for the right to rent the boat and will pay for all boat related expenses, including insurance, maintenance, and marina fees. We will also have access to our boat (or any of the sister boats in any of their worldwide bases) for 12 weeks per year, which is more than we can sail while still working. At the end of the 5-year charter management program, we will move into the boat, do a refit to get it ready for a circumnavigation, and take off!
The rest of this long article is primarily for those interested in learning about the charter management business from the perspective of a new owner. There is a lot of misinformation on the forums and Facebook groups about this process and we hope that this provides some guidance to those who are considering this route to boat ownership.
We will also be documenting our experience as boat charter owners throughout the process with the hope that others can learn from this experience. This is the first of two initial articles about the boat buying process. This post will be about general issues related to charter boat ownership. The next post will be about how to properly model the related financials and determine whether this path makes financial sense for you given your goals.
So here we go…
Why did we become charter owners?
By far the most common question that we get, especially from other boat owners, is why would anyone buy a boat and let other people use it when you can simply wait and buy a 5-year-old boat when you are ready to start your circumnavigation? That is, if your ultimate goal is to own a boat in 5-7 years to do a circumnavigation, why not simply wait until then to buy a boat and avoid the pitfalls of charter ownership?
Yes, there are pitfalls! The most obvious issue with charter ownership is that you are letting your boat be used by others, many of whom may not have extensive experience and may abuse your boat. There is no doubt that charter boats get significant use and get more wear and tear than a similar-aged boat used for private cruising only. But in our experience chartering with tier 1 companies, their boats are always in excellent shape and the vast majority of boats coming out of charter have excellent maintenance records. Most charter programs also include a very extensive phase-out program that involves fixing everything to factory specifications before the boat comes out of charter. The owner can have an independent surveyor complete an exhaustive survey of the boat. The charter company will then pay for all repairs requested by the surveyor that are not considered normal wear and tear.
Another popular criticism of charter programs goes like this “if owning a charter boat is such a good idea, why is it that charter companies don’t buy their own boats”. Or more bluntly, “if it is good for the charter companies, it is bad for charter owners”. This criticism comes from a lack of understanding of the different goals of the two parties (charter companies and owners). It is not a zero-sum game. The model for the charter companies works very well for them. Their goals are to reduce capital expenditures and maximize profits. By having private individuals buy the boats, they avoid having millions of dollars of capital be tied in those depreciating assets. In addition, because charter companies are boat brokers, they make extra income in commissions when the boat owners place an order. So this model becomes another source of revenue for them. However, this does not mean that the owner loses. Owners are not competitors and have very different goals. Most often, owners want to reduce the cost of ownership and/or reduce the cost of chartering. These goals are unaffected by the factors that make this business model work for charter companies. It can work for both parties.
In sum, there is no doubt that charter boats get more use than private boats and some people will be very unhappy with the idea of having strangers using their boat unsupervised. We know this and don’t anticipate being anxious about others being on our boat. Maybe our views are influenced by the fact that we have played the role of charter customers for years and we have treated those boats as if they were our own. We hope that others treat our boat the same way.
So, given the pitfalls mentioned above, many people feel more comfortable simply saving the money and buying a used boat when they are truly ready to take off. That is a reasonable alternative path that will work for many people. In fact, it is an alternative that we considered carefully. Yet, we chose charter ownership for a number of reasons.
Financially, both paths are fairly equivalent in our case. That is, the out of pocket expenses of buying a boat and putting it into charter management and then taking possession of the boat in 5 years can be very similar to simply investing the money in the stock market and buying a used boat in five years (although you have to run the financial models to examine your situation). There are individual factors that may make one option more financially advantageous than the other, but in general, the differences are relatively small. There are also cases where the differences are large, such as when using a Performance Program and getting the related tax advantage (see below). But in our case, the difference was relatively minor. So we did not choose to pursue the charter ownership route for purely financial reasons. Instead, there are some specific benefits to charter ownership that are important to us and made us decide to take this path. These include:
- The ability to charter all over the world at significantly reduced costs for five years while we get ready to start the circumnavigation. Yes, we could have simply chartered boats and paid standard rates, but the economics of charter ownership means we will be chartering for less than 20% of the standard rates. This is a lot of savings when you charter 2-3 times per year for 5 years.
- The ability to do long passages on our boat, which will be critical for our training. Charter renters are not allowed to leave the cruising grounds of the charter area and are not allowed to sail at night. Because we will be owners, the rules do not apply and we will be able to do many multi-day passages on our own boat during the 5 years of the program. That will give us experience sailing the boat short-handed during multi-day passages and will help us get familiar with its systems in all conditions.
- The ability to learn our boat well and understand what upgrades we truly want/need for the circumnavigation. Since we will be sailing our boat every year, we will become very familiar with all its idiosyncrasies.
- The ability to know the boat history prior to the circumnavigation. When you buy a used boat, you are at the mercy of the honesty of the broker and the previous owner. That’s a scary thought when you plan to take the boat across oceans. However, since we will have the detailed maintenance records of the boat, we will know its history very well and will know if there have been any events that may make us question its seaworthiness for a circumnavigation.
- The ability to test the boat extensively and get a real sense as to whether this is the boat that we want to take on a circumnavigation. We love the Lagoon 42 and we think it will work perfectly for our plans. But if during the next 5 years we learn that the boat will not meet our needs for the circumnavigation, we have the option of selling it and getting something that fits our needs better.
- Quality time with our friends and family. During the next five years, we will be able to invite our friends and family to join us on our boat (or sister boat) for free. Being able to take our family and close friends sailing with us is quite important and we very much look forward to the opportunity.
So that’s why we decided to become charter owners instead of waiting and buying a used boat later.
There are benefits and drawbacks of charter ownership and it is definitely not for everyone. Yet, we have consulted with many current and past owners and their feedback is almost universally positive. From these conversations, we learned that if you manage your expectations well, do your homework, and know what you are getting into, you will likely have a very positive experience.
Below we explain more details about the charter ownership process.
Buying the boat and marine mortgage financing:
Regardless of which charter program you choose (see below), you will be required to buy a new boat, most often using the charter company as the broker. If you choose to finance the purchase (like we did), the mortgage will be issued by a third party marine lender. You would be required to pay 20-30% down and meet some strict underwriting requirements. You will then sign on the dotted line and you will “own” your boat and be responsible for the mortgage. This financing process is independent of the charter ownership contract. So in essence, you are truly buying a boat and you are responsible for the mortgage regardless of how the charter ownership program works out.
What we learned about the financing process:
- It is much more difficult to get a large boat mortgage than a house mortgage.
- Beyond the standard requirements (excellent credit, 25% down minimum, etc) there are additional requirements that apply to marine lending.
- Liquidity. Most companies will require that you have enough liquid assets (cash and non-retirement stocks/bonds) to cover all boat mortgage and debt-related expenses (as listed on your credit report) for 12 to 24 months. For example, if your credit report shows $3,000 of monthly payments and the boat mortgage is for another $3,500 per month, the bank will require that you have liquid access of $78,000-$156,000, depending on whether they ask for 12 or 24 months liquidity. This liquidity requirement is in addition to the down payment.
- Loan to income ratio. Your monthly boat mortgage amount must be less than 18% of your monthly gross income (i.e., income before taxes).
- Debt to income ratio. Your total monthly debt-related expenses, such as house mortgage, car payments, credit card payments, student loans, and boat mortgage, must be less than 40% of your monthly gross income.
- Interest rates. This year rates varied between 4.5 and 5.5% depending on the company.
- Avoiding being underwater. If you get anything longer than a 10-year loan (15 year is common) you have to make extra payments every month or you will be underwater (no pun intended) at the end of the charter program. That is, the mortgage balance at the end of 5 years will be higher than the value of the boat if you only pay the standard monthly payments! In our case, the monthly payment from the Charter Company to us will be higher than our boat mortgage bill and we will use that surplus to pay down the principal each month. This will result in us having some equity on the boat at the end of the charter program.
- Marine Lenders. Each charter company uses a different mortgage lender, but the most common are LH Financing and Excess credit.
Finally, the boat buying process is long. We placed the order at the Annapolis boat show using Stephen and Estelle Cockcroft from CatamaranGuru.com, who are the U.S. brokers for Dream Yacht Charters. We contacted Stephen several months before the boat show and he worked with us extensively as we explored our options. He spent countless hours on email and the phone answering all of our questions and providing very insightful suggestions that helped us make a decision about which boat we would buy and which charter program we will use (more below). So by the time we got to Annapolis we were ready!
We had to pay a build deposit of 10% at the time of the order. The remaining down payment will be due at closing, which will be sometime in the summer or early fall of 2018. There is one scary issue about this timeframe. The bank will do a new evaluation of our application before closing. If anything happens between here and then (e.g., North Korea, USD currency crash, major world financial crisis, etc) the deal may fall through. So as you can imagine, we are anxiously waiting for the closing time and hoping that nothing major happens before then (or after).
BTW, Estelle, from CatGuru wrote a cute story about us on their website: A Touching Moment with Boat Buyers at the Annapolis Boat Show.
Issues related to purchase price:
Buying a new boat is not any different than buying a new home prior to being built. The costs involved can vary dramatically based on the options you choose. Most new boats are not priced ready to sail. Instead, they have a base price and then a list of options that rapidly add to this price. If you have used a “build your car” tool on a manufacturer’s website you understand this concept. Except that in the case of boats, the base model is so basic that you will essentially not be able to go anywhere if you do not add options.
Thus, when estimating your costs, such as when building a financial model to see if charter ownership is for you, a good rule of thumb is to find a recent price list for the boat you are planning to buy and add 40-50% to the “BASE” price as the likely final cost including delivery.
When buying a boat into charter, the requirements of the charter companies regarding options will have a significant impact on the full price. For example, a large high-end charter company may require options that add 50% to the base price, such as generators, Air Conditioning, Water Maker, Teak Decks, etc. In contrast, a smaller company may require fewer options that may add only 30% to the base price. That difference can translate into tens of thousands of dollars.
Related to options, depending on the charter company and program (performance vs. guaranteed income) you may or may not have the ability to select the specific options you want. This is one major limitation of some charter ownership programs. There may be options you do not want to buy at this time (e.g., a watermaker) that are required by the charter company, while there may be options you want to buy that the charter company prefers you do not. This may result in reduced cost if the company feels that the fewer added items the better, or in increased costs if the company requires many “luxury” items that you may not have been planning to obtain so early (e.g., water maker).
Just keep in mind, charter companies want to maximize revenue by chartering your boat as much as possible. So they recommend or require certain options because those are the options that their target customers want. If, as a charter owner, your charter income depends on also maximizing charter revenue, then getting these options is in your best interest.
Two final cost related thoughts. When placing a boat into charter you get no broker or dealer discount, so you will be paying the price on the price list. This is an issue if you are buying a boat in a buyer’s market when the manufacturers may be giving discounts as high as 20%. However, this is not the case now and especially for models that have a 1+ years waitlist. There is no incentive for the manufacturers to give major discounts, so there is little difference in the price charter owners and private owners pay for the same new boat. Finally, since most boat manufacturers are in Europe and the boats are priced in Euros, the USD-Euro rate will really impact the boat’s price dramatically. For example, the Lagoon 450 is about $80,000 more today than it was earlier in the year just because of the appreciation of the Euro against the dollar.
Types of Charter Ownership Programs:
Although there are many variations on these, there are 3 main types of charter ownership programs: 1) Guaranteed Income, 2) Performance, and 3) Crewed.
Guaranteed income: This program is offered primarily by the global charter operators including Dream Yacht Charter and Moorings/Sunsail. In essence, the company pays the charter owner 7-9% of the total boat price each year for the duration of the contract, which is most often 5 years. The company also pays for all expenses, including insurance, marina fees, and maintenance during the contract. The expenses are not deducted from the 7-9% income paid to the charter owner. The owner also gets to use his/her boat or a sister boat for a specific number of weeks per year, often between 8 and 12. This is the type of charter ownership program that we are using.
This is how the financials work: Assuming a boat costs $500,000 USD, the charter company will pay the owner $45,000 (9% of 500K) per year in monthly payments of $3,750, which is a total of $225,000 during the 5-year contract. If you are financing the boat, the monthly payments that you receive are likely higher than the boat mortgage which allows you to accelerate the boat payments and avoid being underwater at the end of the charter contract.
The major benefit of this program is that you have no risk during the next 5 years in terms of variability of the charter market due to global economic conditions. That is, you get a guaranteed income regardless of how the charter business is doing. A related second major benefit is that you have no additional costs for the 5 years of the program. You will not have to worry about mortgage payments, insurance, major repairs, maintenance, marina fees, or any other type of boat-related expenses. Given that we will be saving like crazy to have a comfortable circumnavigation, the peace of mind of not having to worry about any boat costs during the 5 years really appealed to us.
There are three major drawbacks of this program. First, you may get less income than what you could get in the Performance program (see below). Second, owners of boats on this program do not qualify for accelerated tax depreciation (for U.S. citizens), which if eligible, could significantly reduce your federal taxes and lower your overall purchase costs. However, the boat can still be placed in an LLC and the depreciation can be applied against the charter income using the standard depreciation schedule for marine vessels, which is 10 years. Finally, because the charter company is not charging you for repairs and all repairs costs come out of their pockets, there is the possibility that some items in need of repair will be overlooked and thus you need to be more active in monitoring the condition of the boat and requesting repairs. This varies significantly by the charter base and thus it is extremely important that you know the reputation of the base manager and talk to other owners.
Performance program. Virtually all companies offer this type of arrangement. In essence, the company shares a percentage of actual charting revenue received (60-80%) as opposed to a fixed amount. However, before they send you the monthly check, the company deducts a commission and all boat expenses. Boat expenses include all maintenance and repairs, insurance, marina fees, and turn around fees, etc. The charter company TMM has a great breakdown of these expenses here.
A major benefit of this program is that it has the potential of being significantly better financially for the boat owner than the guaranteed program. If the world economy is strong, the income after expenses easily surpasses the income you would get in the Guaranteed program. In addition, using this program may allow you to qualify for accelerated depreciation. Thus, you get to depreciate the total cost of the boat against your U.S. federal taxes during the first 5 years on an accelerated schedule. If you have a high income in the US, this results in some major savings. The drawback, of course, is that if the economy crashes, you will continue to be billed for all expenses and the revenue may not be sufficient to cover your mortgage payments and expenses. For example, during the 2007-2009 crisis, many owners in the Performance program did not receive enough income to cover the boat costs. That did not happen to those in the Guaranteed program.
Crew Charter. The Crewed Charter program is most often the same as the Performance program with one big difference: a professional crew will be included in all “rentals”. That is, the charter company will not rent the boat to other sailors who will then sail the boat on their own. Instead, the boat is rented to customers, most often families or couples, who pay to have a professional captain and crew take care of the sailing and crew roles. We did not consider this program because it is usually limited to much larger boats. For those buying a large catamaran (50+ feet or larger), this may be an excellent alternative since the presence of the professional crew means less wear and tear, lower risk of accidents, and better maintenance.
Charter Selection Company:
When selecting a charter company to manage your boat, owners have many options. They vary in multiple key factors, including what types of programs they offer, what boats qualify for their programs, and where the bases are located.
In our case, we wanted a charter company that 1) had bases all over the world with reciprocal owner use so we can sail in other regions, 2) offered a Guaranteed income program, 3) allowed us to buy the boat model we wanted.
Below are our honest thoughts on how we ended up selecting Dream Yacht and the other companies we considered. There are many other companies, so this is just limited to the companies we considered.
Moorings and Sunsail: This is a global company with bases all over the world. They offer the Guaranteed program and reciprocal boat use. However, their catamaran fleet consists exclusively of Leopard Catamarans. Although these are nice boats, we don’t like their new models and thus we eliminated them.
Tortola Marine Management (TMM): TMM is a small high-end boutique operation based in Tortola, BVI. TMM has a very good reputation with owners and customers alike. I know several of their boat owners and I have chartered with them often. The feedback I’ve received is that they truly make owners feel like family. They are flexible in the type of boat that can be put on charter, so that was a major positive over Moorings/Sunsail. However, they do not have a Guaranteed program and they do not have reciprocal owner use in other bases since they only have the BVI base. We wanted a guaranteed program AND to charter around the world, so we decided to eliminate TMM despite how highly we think of them. It was actually painful to pass on the opportunity to join their boat owner family. If I were considering a Performance program and we didn’t care about global reciprocal use, we would have most likely used TMM.
Other Boutique Companies: There are other high-end companies that we considered but then eliminated based on the same constraints of TMM. These include Sail Caribe and CYOA Charters.
Dream Yacht Charter: Like Moorings/Sunsail, DYC is a global company with bases around the world. They have a guaranteed income program, reciprocal owner use in their global bases, and have a diverse fleet that included the Lagoon 42. This was the only company that met all of our requirements. We selected their Antigua base because of the excellent reputation of the base manager and very satisfied owners and customers of that base. More on this on the base selection item below. Our experience so far with DYC has been excellent.
Boat and Cruising Ground (Base) Selection:
The selection of your boat and charter base should be influenced by your end goal and type of program you are using. If you are using a Performance program and you really want to maximize income, then you would select a very popular boat in a very popular cruising destination. For example, the Lagoon 450 in the British Virgin Islands is likely the most profitable combination for bareboat charter owners in a Performance program. A Lagoon 450 may be more expensive than a smaller catamaran, but it charters significantly more than most 40ft cats and generates disproportionally more revenue. This makes the 450 a better choice with lower total out of pocket costs. This also reduces the global economy risks. That is, even if the charter weeks for the 450 are cut in half during a very bad year, that may be enough to still cover your boat mortgage and expenses. In contrast, a cheaper boat may not generate enough income to cover these expenses. Note that this is only an issue because in the Performance program you are responsible for the expenses regardless of how much the boat charters. On the other hand, in the Guaranteed income program, the income is fixed as a proportion of boat price and is not impacted by how much the boat charters. You are also not responsible for boat expenses. So selecting a 450 over a 42 for a Guaranteed program would not lead to any financial benefit because the increased income from the 450 would be linearly proportional to the increase boat price. In addition, the 450 would get used more than the 42 resulting in more wear and tear. So if you are in a Guaranteed income program, selecting the most popular charter boat is not necessarily what you want to do.
A similar approach should be used when considering the charter base. If you are in a Performance program, you want to maximize charter use to increase charter income. So you would choose a popular destination, such as the Virgin Islands. However, if you are in a Guaranteed income program, you want to minimize charter use in order to minimize wear and tear because charter use does not impact your income. Thus, you are better off selecting a less popular cruising grounds that still meet your needs.
Another key consideration is the reputation of the selected base. The quality of the maintenance of your boat is often a function of the quality of the base manager. If you have an excellent base manager your boat will be maintained extremely well. If you have a crappy base manager, your boat will suffer. In our case, our broker worked with us to help us select a base that was the best option for us. We selected Antigua for various reasons:
- It is significantly less popular than the BVI so the boat will get less wear and tear.
- It is in more difficult sailing grounds and thus it attracts more experienced charter customers (renters).
- The sailing grounds involve primarily going up and down the island chain on a beam reach (assuming standard tradewinds). This means significantly less use of the engine when compared to a place like the BVI where customers will be motoring extensively against the wind.
- We love Antigua. I (Nestor) did all my RYA training there and we have visited there with our parents when cruising.
- The base of Dream Yacht Charter in Antigua has a stellar reputation. The base manager is supposed to be one of the best and the feedback I’ve received from owners is that it is an extremely well-run base that does an excellent job at maintaining the boats.
- Easy access from the U.S. with many direct flights from NYC, which allow us to get there with a single stop-over.
In sum, buying a boat to put into charter requires homework and the right goals and expectations. Given our goals, it is the perfect choice for us. Clearly, other people have different goals and owning a charter boat will not be the best option for them.
We hope this post was informative to those considering buying a boat for charter. Next week, I will write a more technical post about how to run financial models to examine whether this path to boat ownership makes financial sense for you.
If you like this article, follow us on Facebook at Blue Buddha Adventures where we post more frequent updates about our travels and our experience with Charter Ownership. If you have questions, post them on facebook on the related post or email us at email@example.com