Questions About Putting a Boat Into Charter . . .

[Rich_Maler]

This is my first thread in the group, so excuse me if this is not posted in the right place or if it is covered elsewhere. My question is about putting a new boat into charter. Just to give you a quick background, I am a father of a 4 year old daughter with another on the way. I do not have plans to cross oceans anytime soon, but I love sailing in new and familiar locations and everything it offers me and my family. I have taken my wife and daughter on several charters in the US, the Caribbean and Aegean on everything from 36’ mono’s to 42’ cats. We have thoroughly enjoyed it. So this led me to think of a way to do it more often and at reasonable cost.
My goal is to cruise for several weeks to a month a year in new and different locations. I am considering buying a boat and chartering it with a big company like the moorings. For me I think the ability to sail a boat in one of over 30 locations for several weeks at a time over the years sounds perfect. Here is where I need more info, and not from a biased broker but hopefully from some of you who have done it. There comes a break even point at which just paying for the charter as you go makes more sense that being an owner in a program. That point is unclear because I have not been able to determine how much I could expect to get when the boat sells. Will I be upside down after a 4 year contract with the standard 20% deposit? Moorings guarantees you approx 50% of the boat cost in revenue over 4 years if I understand correctly. Is it possible to get some of the original deposit back from the sale, will it be break even, or will it cost me at that point. Sorry I rambled, but any insight would be appreciated.

[jzk]

Look at the values of the Moorings boats coming out of Charter. They take a beating. I haven't heard of one single financial reason to buy a new boat and charter it.

Now, there might be something to buying a boat 4 years into charter for cheap. Most of the depreciation is already behind you.

[Rich_Maler]

Yes I have seen the value depreciation of x-chartered boats. My intention is not to keep the boat but rather to trade up or get out of the program at that point. I guess what I am looking for is a financial comparison for my situation. If I plan on chartering for 3-4 weeks a year for 4 to 5 years what would be the cash outlay if I pay as I go or would it be cheaper and better to buy into a program like the moorings, or is there another option which would allow me to sail in different areas spending a month or less on the boat a year? Here are the numbers I am working with so far, any advice is welcome especially from previous moorings boat owners:

Chartering @ 39-40' mono at $3500 per week for 4 weeks over a 4 year period is $56,000 (that's 10% off long term disc., 5% off repeat customer and 10% off as they frequently run specials gave me the fig. of 3500 for a bene 393)

Buy: This is hard to compare because all of the new benes are new models so comparing price of the boat and resale is a little harder. Lets take the 393- 2004 models are listing for 125,000 from the moorings, what they sell for is another question (anybody buy one?) What was the original purchase price on these in 2004? , again these are the two pieces of the puzzle I am really looking for. Also is it my understanding that if all of the revenue if used to pay down the loan that about 50% of the original price would be left in principal in the normal 20% down scenario.

Only with these numbers will I know which will cost more the 56K to charter or buying into the program. I know their are a lot of variables, but feed back from any one with first hand experience with a large charter firm purchase and phase out would be most welcome. Also any other ideas, perhaps another option to accomplish my goal.

[catinq]

Hello, also looking for any Moorings charter vessel owners. Am constantly in contact with Lagoon and was going to purchase a 420 but received some excellent info from moorings. They guarantee a monthly income plus up to 9 weeks charter per year. Any info from owners would be greatly appreciated(looking at purchasing moorings 4600)

[Vasco]

Rich,

It is cheaper to charter than to put a new boat into charter. The big outfits like Sunsail/Moorings (same outfit) make their money from selling boats to be put into charter. Check around on the internet all sorts of charter stories. When those 2004 393's were put into charter in 2004 I bet the cost to the new owner was well over $200,000. You have to buy the boat to their specs. And who wants a 393 with two aft cabins and a galley along the starboard side of the saloon. Not too practical for a cruising boat but very nice for a two week charter. You say you intend to trade up or get out of the program at the end of the 4 year term. You will take a helluva hit if you get out. Here's the experience of one of the guys in my club that bought a used charter boat and put it into charter.
http://www.usual-suspects-sailing.com/index.html

If it's such a good deal why don't those outfits just but their own boats? Because there's more money in selling than chartering. They might guarantee you 50% of the boat cost but that's with a long amortization period for the loan. At the end of the four year contract you will still owe a lot on the boat and will probably be upside down and stuck with it.

[Rich_Maler]

I read over your friends 8 yr experience with Barefoot. Sounds like he did very well. His net cost was 22K approx. over 8 years and he used the boat over 20 weeks. If I understood it correctly. He spent 22K net as opposed to approx. 50 to 60K to charter for the same amont of time. This is realy at the root of my question I plan on chartering about 15 weeks over the next 5 years. Will I spend more chartering or can I do better by entering a program? In your friends case he did much better.

Catinq,
I have chartered the Leopard 40' and the Lagoon 420 but not the Leo 46. I can tell you that the 40 is a fast boat considering all the charter stuff aboard. The layout is good but not great. One concern I had was when in the forepeek birth looking at the bow from the inside you could see tenslucent sunlight illuminating the seam at the bow. I am not a construction guru but I did not like that. As far as the 420 I have never seen a boat with more space in it than that. Accomodations blow away the Orana 44. The underwater clearance is poor, however Lagoon has the V shaped nacel which reduces the impact of slamming. I was not in big seas with Leopard but I have hear other complain of slamming. I was in force 7 in the Agean with the 420 without a problem.

[nautical62]

Rich, After owning two pocket cruisers, that I frequently sailed to the Bahamas, I now have a 33-foot Beneteau in charter with the moorings. After crunching the numbers, I decided that for the 4-7 weeks I typically cruised a year, owning a boat in charter was cheaper than either chartering for a similar amount of time or owning and sailing. I'm about half way through the contract and still believe this to be true.

The economic idea is simple: It's more cost-effective per day or week to have a boat used for much of the year than to be paying all the overhead for only 8 weeks of use. Insurance, dockage and to some maintenance costs are fixed and will cost the same whether you use a boat every day or never. Spreading these costs out over more days of use or more users brings the costs per use down.

In my case, I'm buying a boat that is more expensive than I otherwise would have purchased, but as you mentioned I'm getting almost half of that back in guaranteed income. I also have no insurance, no maintenance and no storage fees. As others have said, a boat coming out of the program will likely devalue more than a similar boat under private ownership. However, basic math will tell you that getting close to 50% of the boat price back and having no overhead far outweighs this difference.

Let's take my 120K 33 foot boat for example. I'll get about 53K in revenues for it over the contract period which brings the price I paid down to 67K. Now lets assume prices have really cratered and I only can get 1/3 of the initial price back: 40K. This brings down the cost of ownership to me to 27K. That's less than 5.5K/year for the 5-year contract time. (If I sell it for 60K which the guaranteed trade-in price, that number becomes less than 1.5K/year) Do you think you could charter 4 or more weeks a year for that price? Do you think the depreciation, insurance, storage, and maintenance on a boat in private ownership will be less than that? Also - what isn't factored into this is that you can sail anywhere there is a base, not just out of your home port. All your vacation time can be spent sailing, not working on your boat and of course the headache factor is much less.

What you need to do however, is crunch the numbers for how you would actually behave in each circumstance and weight the pros and cons that apply to you. Charter ownership does not allow you to: drive to the marina and take your boat out for an evening sail, make what ever modifications you want to the boat, keep your boat anywhere you want or cruise for more than 9 weeks per year. Of course, neither does chartering. What I also did not factor in above is the owner use fee which includes linens, boat items, dinghy rental, fuel, etc. Private purchase of these things would certainly be cheaper for most people. Another question to answer is: Will you split this fee with all on board or bare this cost yourself? When I have friends join me they are more than happy to split this cost since they are appreciative that this is so much cheaper than splitting a charter. Not even comparable. However, If I were to pay that all myself, that would add another 1.5 -2K to the yearly cost. (I recently booked 2 weeks exchange in the Abacos. My owner fee is $720. Chartering would have been $3,800)

If you would otherwise have purchased a boat, you must consider how much would you have spent on that boat and what costs would you have faced maintaining it? Also what would you have done with any difference in the money spent? Compared to the stock market, having money in my boat has been a great value lately.

Buying a charter a boat is certainly not an income producer, but I think it may offer a less expensive option than either chartering or owning. The question is - are you content with the limitations it has?

As for me, I'm currently looking at going back into having my own boat, not because I think charter management is a bad economic choice, but because I will have more than 9-weeks a year to sail. If I only had 4-7 weeks per year, I'd stay in the Moorings program for ever.


PS one more thought on how hard a charter boat gets used: It gets used hard, harder than a similar boat would likely get used. This is something you hear often and I agree with it. However, what you don't hear as often is that these boats are also maintained in a condition charter people are willing to pay thousands a week for. At the end of the program you are guaranteed, that while worn, things will be in operating condition. Compare this to a sea trail and survey I just finished on a private boat where every seacock is rotten and needs replacing, the cutlass bearing is shot, the engine is not aligned, the rig has been wrongly tuned, deck delamination has gone untreated, The wire/rope halyard is the wrong size, the holding tank bladder is broken, the settee is rotted through, most instruments don't work, it doesn't have self steering, GPS, etc, etc...

Feel free to send me a message if you'd like to talk more about what my experience has been.

- Dave

[nautical62]

Loan- Vaco makes a good point about the loan situation. The typical 15-year loan option allows you to get into the boat with very little money down and no monthly payments, BUT for it to work out in the end requires you are able to sell the boat for 50% of the purchase price. If you can't, you then could find yourself with continued payments as well as having to pay insurance, dockage, etc. (Of course many boat owners have monthly loan payments, dockage and insurance.)

An option I prefer is instead of taking out a 15-year loan, take out a 5-year loan so you will own the boat outright at the end of the 5-year contract. If you can come up with 50% of the purchase price, your guaranteed monthly income will just about pay the loan payments. If you put down less, you will have to pay out of pocket monthly expenses yourself, but that's the nature of loans isn't it? Either way, now you won't be stuck with loan payments when the contract is done and have the value of the boat what ever that is.

For me the worst possible case scenario would be that I pay $67K for a $120K boat and keep it in the Moorings and then Footloose for a total of 8 years, having no insurance, maintenance or dockage costs. Assume the boat is then worth nothing (unlikely). The average cost of ownership then would have been 8K per year which is still much cheaper than chartering 4-6 weeks per year would have been. That's also what a boat that only depreciates 3.5K per year, costs 2K to insure, 1.5K to dock and 1K to maintain would cost. So even the worst case scenario isn't that bad.

[vegasandre]

Here is what I did...
I explored all options :
should I just buy a boat or put one into a passive charter situation with one of the big companies?
But here is what I uncovered this year :
Under Section 179 of the new 2008 economic stimulas package:
for this year only you can deduct the full cost of the boat up to 250k (and 50 % of the remainder up to 800k) if you can show and meet some pretty stringent but not at all impossible -criteria showing you are actively involved in the buisness of chartering your boat. You have to treat it like a buisness and if you meet the criteria correctly - you can write it all off .
Of course you can also deduct you expenses such as slip, interest payments insurance etc against your charter income too.
And this deduction can go against all of your active income from other work or buisness.

So I placed it with Harbor yachts in San Diego and plan to use it a lot as well.

Of course I am not a accountant so if you are going this route you need to speak with one who is familiar with the process for the section 179 deduction.

I will let you know how it goes but I have spoken to people who have successfully done it past few years when this deduction was a lot lower- 125k ish. the rules havent changed -only the amounts.

[GordMay]

See the Robert Charuk (“The Usual Suspects”) Charter Boat Ownership Reports describing the experience of charter boat ownership:
The Usual Suspects - What's New in This Month's Update

Particularly his final summary report:
The Usual Suspects - The Boat - Charter Boat Ownership - 4th Year Anniversary Report

His site also provides some great cruising information:
The Usual Suspects - Caribbean Sailing Adventures

[Rich_Maler]

Thanks Dave, You kinda confirmed what I was thinking. I know allot of people think that I have a crazy notion that I want to do this to make money !? Of course I am not THAT stupid. I am just looking fo the least expensive way to cruise a month a year in new and different locales. The user fee sounds kinda high unfortunately. Otherwise your numbers sound good.

Vegasandre- Good point about the tax write off. In my situation it would mean that the gov. would be giving me back half of the money I would need to put down on the boat! Unfortunately I am not pulling the trigger this year. I was wondering if the moorings style charter would qualify? Do you know?

Gord- I read the everything on the site. Great story. He really did well and had some great times with a total cost of 20K for 8 years of trouble free boating on a 40' boat. Not to shabby. He opted for a second tier charter which has the one draw back of not having the reciprocity with bases arround the world, However this might be a great way to start because it would limit my risk while I tested the waters.

Thanks again for all the great info. I am glad I decided to take the plunge and start my first tread.

[nautical62]

Rich, The basic economics are sound I think. However, do consider the owner's fee and supplemental insurance (if you will be opting for it) into the equation. Also an above post made me also realize you need to consider the tax implications. Owner revenues, legally should be counted as income on your taxes, so you loose some there. My experience is that this is largely, but not completely compensated for by the depreciation deduction you are allowed.

The other thing to consider is that you are likely purchasing a much newer and more expensive boat than you otherwise would have. There is no doubt in my mind that buying a boat in charter is much cheaper than owning a similar boat yourself. However would you be buying a similar boat yourself? One thing I came to realize, is I'm just as happy cruising on a 20K classic boat, equipped with the KISS principle as I am a modern more egonomic 120K Beneteau.

Compared to chartering, charter management is much more affordable assuming you are committed to wanting to do that with your vacation time 4 weeks per year. You are paying for it whether you sail or not.

Best of luck.

[Reality Check]

Rich, from your initial post... one of your key points is to do your boating in different areas. Since you also indicated your plans presently are for 3 to 4 weeks over the next five years you may find your "best" option is to get into the buy- charter plan at the location you think you will want to spend "most" of your time or the place you want to have the boat stationed in 5 years.

Owning a boat and sailing only 3 to 4 weeks a year in very different locations (across oceans) would just be difficult. Of course you could have the boat delivered to your intended cruising area each trip but that doesn't seem totally viable to me.

I was looking at similar situations not too long ago and did look at the same options. The main difference is I wanted to sail a couple of times a year for 2 to 4 month cruises.... something the charter companies do not like and I was told at the time it would not be acceptable per terms of the purchase/charter agreement. The wanted to restrict me to no more than 2 weeks at a time unless I paid fees or take a different boat.... Not acceptable for me.

I ended up selecting the location I wanted to spend most of my time operating out of for the next few years and purchased a boat coming out of charter. You do have to evaluate every boat because some have far heaver ware than others when they are otherwise the same. And contrary to common misconceptions you can find very good values on good boats in good condition if you look and study and physically check out the boats yourself prior to making offers. I flew down and spend more than a week looking an a dozen boats in detail and another dozen+ casually AFTER I had excluded MANY from consideration base on available data and photos on the boats and the recommendations of a broker I had trust in who understood what my boating interest/ goals were.

I've never felt I made an error in my purchase and have since enjoyed many weeks at at time cruising with friends/ relatives and solo adventures.

If you DO want to spend time in the Carib, Med, upper Atlantic and Pacific then ownership just does not look like it would work well for you unless you were in a charter company that allowed trade-off/ swapping of boats and locations as part of your charter agreement.

Boating is not an investment....... You will always come out financially on the negative side... Your goal is to simply make that the lowest amount possible AND to get the level of enjoyment that your willing to pay for.

In 5 years your goals may have changed but if you have your boat in the area you prefer then you still have the potential of getting continues enjoyment but may loose the opportunity to visit other locations that are distant from your boats home base.

[David_Old_Jersey]

I am neither for or against the concept - seems to make some financial sense as long as you use the boat to the max. and their is a certainty on costs which is never to be sniffed at.

Also (to me) someone else on the ground (far away from me) being responsible for taking care of the vessel (and having a financial self interest in doing so properly!) would be worth good money in my like for like calculations.

Maybe have a look at the boats coming out of Charter / for sale and crunch some numbers on them to get an idea of the sort of boat condition you are going to end up with and cash needed to spend to either sell, p/ex or keep in the area for your own use........

[vegasandre]

HI Rich
with the Moorings ,Sunsail or any of the big name charter outfuits it would not qualify with this deduction due to the owner being "passive" involved in it. with these charter companies they take care of most if not all the expenses, advertising , etc.
you have to show you are actively involved in the buisness of yacht chartering. here is a synopsis"
Here is a summary of the tax and operating benefits available for new yachts placed in charter in 2008:

1. By placing a new yacht in charter in 2008, you can receive a tax deduction under Section 179 of the Internal Revenue Code of up to $250,000, or the price of your new boat, whichever is less, and additional first-year depreciation equal to 50% of the remaining cost of the boat in excess of $250,000, up to a maximum deduction of $400,000.
2. You are able to depreciate the remaining cost of your yacht (that portion not taken as a deduction in 2008) using 10 year accelerated depreciation (MACRS).
3. You will receive income from the charter of your yacht (60% to you and 40% to the charter company).
4. You can deduct against charter income all ordinary and necessary charter related expenses (berthing, insurance, repairs, loan interest, etc.)
5. Your yacht will receive the care and management of a professional staff - just compare the condition of yachts in a charter fleet to other yachts in the marina.
6. You will have the opportunity to significantly reduce the time it takes to pay off your yacht.
7. There will be a dramatic reduction in ownership expenses.

now the Active vs Passive part:

Generally, losses from passive activities may not be deducted against non-passive income. Passive losses in excess of passive income is disallowed and carried forward to offset passive income from future years. Unused passive losses are allowed in full in the year the taxpayer disposes of his entire interest in the activity in a fully taxable transaction.
If a taxpayer has passive income, passive losses pose no problem. If a taxpayer does not have passive income, they need to “materially participate” in the business in order to create active (not passive) business losses, which can be used to offset income.
Any rental activity is a passive activity whether or not the taxpayer materially participates. However, if one of six exceptions in met, the activity is not termed a rental activity for purposes of the passive loss rules. One of these exceptions is when the average period of customer use of the property is seven days or less.
Once we have avoided the application of the rental activity classification, we need to create “material participation” in the activity to avoid having it classified as a passive activity resulting in passive losses. The taxpayer has to satisfy one of seven tests in order to be considered as materially participating in a given year. One of these tests is to participate in more than 500 hours per year. A spouse’s participation is combined with the taxpayers in achieving the 500 hours. Visiting the business site, inspecting the boat, supervising repairs, maintenance, taking the boat out to insure it operates correctly and safely, bookkeeping, tax planning, etc., all would be activities which would count towards the 500 hour requirement.


hope this info helps everyone.