Does charter ownership work? Creating a financial model.

Deciding whether charter ownership makes sense for you should involve the careful examination of financial models of your options. Although most companies will provide you with models, it is important that you run your own models, understand each factor that can impact the outcome of the model, and manipulate the assumptions that are relevant to you.

This post is a follow up to our earlier article on why we decided to become charter owners. That article deals with more big-picture issues of charter ownership such as risks, rewards, and types of ownership. The post below instead is primarily about the economics of ownership.

The model below applies specifically to “bareboat” charter ownership of boats in the 40-50ft range. There are other charter ownership programs such as crewed charters, owner-operated charters, etc., that require a different set of assumptions and thus a different model.

Use Cases

Below we created financial models based on two different use cases that vary as a function of the end goal of the owner.

Use Case A assumes that the owner wants to reduce his/her charter costs and thus it assumes the sale of the boat at the end of the program. This is the case for someone who charters often and is not interested in taking possession of the boat at the end of the program.

Use Case B assumes that the owner wants to reduce the ownership costs while still chartering, and thus it assumes the purchase of the boat at the end of the program. This is the case for someone who charters often AND wants to buy a boat. Thus the charter ownership program is used to simultaneously reduce charter and ownership costs. That is our case.

The two reasons above require slightly different models because the final outcome is slightly different (to sell the boat vs. to buy/keep the boat).

The options and assumptions.

Regardless of the use case, we essentially compare 3 options:
1. Investing the down payment in the stock market instead.
2. Buying a charter boat under a guaranteed income program*.
3. Buying a charter boat under a performance program*.

*See our previous article for a discussion of these models.

Each of these options will be presented below as separate columns. Each of the options has some basic assumptions that impact the model. You may not agree with the assumptions below. Some of you may think they are too conservative while others may think they are too optimistic. You should modify them as needed. It is important that the models are built on assumptions that are believable to you given your context because the end goal is to use the model to guide your decision making. If you don’t believe the assumptions, the model is worthless.

All models below are based on the purchase of a boat with a ready to sail new price of $550,000 USD with an estimated 5-year value of $357,500.

Option 1 (Investing down payment) assumptions.

• A down payment of $137,500 is invested in the stock market making 7% per year.
• You charter 3 weeks per year and pay for it from the investment account.
• You receive contributions from charter guests in the amount of $1500 per charter.
• In the case of Use Case B, you purchase a five-year-old boat in 5 years in cash for $357,500.

Option 2 (Guaranteed Income) assumptions.

• You finance the purchase at 4.5% interest for 15 years with a 25% down payment.
• Down payment = $137,500.
• Mortgage monthly payments = $3,156.
• Guaranteed income of 9% per year = $49,500/year = $4,125 per month.
• 100% of the income is used to pay the boat mortgage with any additional payment put into the principal each month.
• Surplus used towards the principal each month: $4,125 – $3,156= $969.
• Mortgage balance in 5 years = $239,350. Use an amortization table with extra payments for this such as https://www.mtgprofessor.com/calculators/Calculator2a.html
• Boat value in 5 years = 65% of new = $357,500.
• Taxes of income are offset by boat depreciation at the standard 10-year schedule.
• Chartering costs per week = $700 (insurance deductible waiver and turn around).
• You receive contributions from charter guests in the amount of $1000 per charter.

Option 3 (Performance program) assumptions.

• Boat purchase and related assumptions similar to Option 1.
• Income Assumptions (TMM program):
  • Charter weeks per year = 20, including 12 in high season and 8 in low season.
  • Revenue share 75% (i.e., 25% commission to charter company).
  • Revenue high season weeks $8,800/week x 12 weeks = $105,600 – 25% = $79,200.
  • Revenue low season weeks $6,400/week x 8 weeks = $51,200 – 25% = $38,400.
  • Total annual Revenue = $117,600.
  • The above assumes fixed charter price throughout the program.
• Costs Assumptions (based on TMM program):
  • Turn around fee $485 x 20 weeks = $9,700
  • Boat watching $57/week x 32 weeks = $1,824
  • Insurance 2% of boat value
    • Y1-Y2 = $11,000 per year.
    • Y3 = $9,350 (2% of 85% value).
    • Y4 = $8,250 (2% of 75% value).
    • Y5= $7,150 (2% of 65% value).
  • Dockage $200/week x 32 weeks = $6,400
  • Annual Maintenance = 10% of hull value = $55,000
• Chartering costs per week = $700 (insurance deductible waiver and turn around).
• You receive contributions from charter guests in the amount of $1,000 per charter.
• You have to decide whether you will be using Section 179 against taxable income. This applies to US citizens with high taxable income. In essence, section 179 allows you to depreciate the cost of the boat using an accelerated schedule, which allows you to minimize or eliminate your federal taxes during 1-2 years. The resulting tax returns can then be used as revenue when calculating your program costs. Although there is a space in the model spreadsheet to calculate the impact of section 179, I am not using this option on the models below and the spreadsheet needs to be adjusted based on your income and tax rate.

THE MODELS

The raw data for the models below can be accessed at this Google Spreadsheet Link:
https://docs.google.com/spreadsheets/d/1jfvdTtS1Oo8clyrVEUaphqVCohLR2mpHcRtkwY5ucI4/edit?usp=sharing

The link brings you to a “view only” file but if you have a google account you can make a copy of the file using File > Make a Copy and you will be able to edit and change the assumptions. If you don’t have a google account I believe you can still export it into an excel file.

Model for Use Case A

As I mentioned, this Use Case A involves someone who does not want to take possession of the boat at the end of the program and is instead interested only in reducing the charting vacations costs.

The model starts with a basic breakdown of the boat purchase costs and financials. The three columns represent the 3 main options. The data below is the same for both of the charter ownership options (Guaranteed and Performance). There is no data for the Investment option since this option does not involve buying a boat. Essentially, this Investment option is our “control” condition. It compares becoming a charter owner against the common suggestion to put the money in the stock market instead and keep paying out of pocket for your sailing vacations.

 

Then we start analyzing income. The first piece applies only to the Investment option. It assumes putting $137,500 in the stock market and making 8% interest. However, it also assumes that this account will be used to pay for all the charting costs, so it assumes a withdrawal of $23,700 per year (see charting costs below). Thus, the return is not a compounded return of 8% but it assumes that the balance is dropping each year by $23,700. For a detailed analysis of how to calculate the total 5Y return, check the Investment Income tab in the spreadsheet. It is possible that the person is paying for the sailing vacations from a different source of income that is not generating interest/gains such as the person’s own salary. In such a case, then the account would be generating more revenues than indicated below.

 

Next are the income calculations for the two ownership options. The Guaranteed income calculation is pretty simple as it involves just 9% of the hull value each year for a total of $49,500 per year. The calculation for a performance plan is a bit more difficult because it involves estimating how many weeks the boat will charter. In the example below, we assume 2 seasons (high and low) with the boat charting for 12 weeks in high season and 8 weeks in low season generating a total of $156,800 in revenue not including commission costs. The total revenue after 5 years for all 3 options is below.

 

 

Expenses

First, we start with mortgage-related expenses. Since this assumes a 15-year mortgage, it is important to make additional payments towards the principal otherwise you risk being underwater at the end of the charter contract (pun intended!). We assume that the extra payments will come from the monthly surplus of the difference between the guaranteed income payment and the mortgage payment. That is, under the guaranteed income program, we would receive $969 per month more than the mortgage payment ($4,125 (income) – $3,157 (mortgage) = $969 surplus), which can be applied towards the mortgage principal. For purposes of simplicity, the model for the Performance option also uses the same amount of additional payments.

 

Charting costs are pretty simple to calculate. All programs will incur some expenses in the form of a cleaning (turn around) fee and a waiver/reduction of the insurance deductible. We calculate this expense to be $700 per week. As you can see below, if you assume that you receive a contribution from guests to offset your cost, you actually end up with a surplus for each week you charter in the Guaranteed and Performance program. For example, the total chartering cost every time you take the boat out is $700 or $2100 per year, but if you receive a $1000 contribution from your guests per charter ($3,000 annual), you end up with a $900 surplus per year. In addition, under the Investment option, you would be paying the full chartering cost for a total of $23,700 per year. This is the amount that you would withdraw from the investment account under the Investment option.

Next, we have the Performance program costs. These are pretty simple to understand but I should highlight that the model below assumes 12% of hull value in maintenance expenses per year. This may be too low in some years and too high in other years. Yet, this has a massive impact on the Performance project metrics. If maintenance costs are closer to 15% then this program only works if using IRS Section 179 to reduce federal income taxes.

Finally, we have the calculation of total program costs. For the Investment option, the calculation is fairly simple. You start with a $137,500 and end with $74,371, leading to a total cost of $63,129.

The calculation for the other two programs is a bit more complex. It assumes that the boat would sell at the end of the program for 65% of its original value and that your selling costs would be 10% of the sale price. At the end of the program, the model indicates that the Guaranteed program would cost you $50,600 of actual out of pocket costs, while the Performance program would net you an extra $19,530. Now you may think that the Performance data is unrealistically optimistic, and you may be right. Any minor changes to the Performance assumptions, both in terms of income and expenses, can lead to a major difference in the outcome of that program. For example, if you change the maintenance cost to 15% the final number moves from a net surplus of $19,530 to a cost of $62,970. This is the major risk of the performance program. It works beautifully if the economy is strong, world politics are stable, and no frequent major repairs are required, but it falls apart if any of the assumptions don’t hold up.

Finally, below I present the comparison of charting cost. As you can see, using the assumptions above, the Guaranteed income program is not much different than the Investment option in terms of total charter cost, although it does lead to a $12.5K savings. The major saving would come from a Performance program if the assumptions hold.

 

Model for Use Case B

In the case when the owner is using the program to lower the ownership costs while still chartering, the model will differ only in the way we calculate the final bottom line costs.

 

The models assume that we would either buy a 5-year old boat in the case of the Investment option or pay off the mortgage in the case of the two charter ownership options.

As you can see, purchasing a 5-year-old boat (while still chartering for 5 years prior to the purchase) will cost 48K and 118K more than in the Guaranteed and Performance programs, respectively. Whether that is “worth it” is a matter of heated debate, as it involves the valuation of multiple other factors that are not easily quantifiable. For us, it was obviously worth it as we explained in our post: Buying a Sailboat for Charter: We Bought A Boat.

 

Now it is up to you to modify the assumptions as needed using the spreadsheet link and determine whether charter ownership works 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 bluebuddhaadventures@gmail.com