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Sam Plan B · 17-12-2013, 16:48

That's a good plan if you don't mind carrying $80,000 in debt. Personally, I prefer to be debt free. I sleep better that way.

Capt.Alex · 17-12-2013, 16:53

I sleep well knowing I can pay off my boat whenever I want. I also sleep well knowing most of my assets are making money to support my cruising habit

GILow · 17-12-2013, 17:20

Quote:

Originally Posted by wanderlust42

What am I missing? I'll be faced with a decision in a couple of years to pay cash or finance a used ~45' catamaran in the $400k-$600k range and I just can't see why in the world I would plunk down 100% cash up front instead of leveraging 75-80% of that amount over the term of a 10-20 year boat loan.

Thanks in advance for your thoughtful responses!

I got a bit lost in all that, but at least here in Oz it is reasonable to consider that a home will appreciate in value over time, regardless of the level of maintenance you apply, since the land value is about 70% of the home purchase. Over a short period house have depreciated (recently) but I don't think you'd find any in "normal" suburbs that did not appreciate significantly over a 10 year period.

I don't think this can be said for a boat.

Matt

wanderlust42 · 17-12-2013, 18:02

Quote:

Originally Posted by Capt.Alex

Another factor to consider- In the unlikely event of a catastrophic loss to the vessel, I won't have nearly as much at stake to fight with the insurance company over. The bank has a whole stable full of attorneys to do battle with the insurer. Let Goliath fight it out with Goliath. The bulk of my assets will still be safely locked inside my bank.

I hadn't considered that but it's a great point--now I'm even more convinced that conventional advice isn't necessarily savvy advice.

Quote:

Originally Posted by Capt.Alex

I sleep well knowing I can pay off my boat whenever I want. I also sleep well knowing most of my assets are making money to support my cruising habit

Precisely!

Quote:

Originally Posted by GILow

I got a bit lost in all that, but at least here in Oz it is reasonable to consider that a home will appreciate in value over time, regardless of the level of maintenance you apply, since the land value is about 70% of the home purchase. Over a short period house have depreciated (recently) but I don't think you'd find any in "normal" suburbs that did not appreciate significantly over a 10 year period.

I don't think this can be said for a boat.

I don't think appreciation/depreciation is relevant to this analysis. Pick your boat, pick your price, pick your period of time of boat ownership before selling it at a terminal value which is less than what you paid for it due to depreciation . . . it doesn't matter what assumptions you make. If you can leverage an asset (even a depreciating one) as collateral to borrow money at a cheaper effective rate than what you can make on investment returns, then financing is better than paying 100% cash. Either way you're going to incur the economic cost of the depreciation and maintenance over the term of ownership. So then it's a question of whether or not to keep the 75-80% cash, pay interest on it, but earn more from investing it than what you pay in interest. That "profit" can help offset the cost of depreciation and maintenance.

GILow · 17-12-2013, 18:08

Quote:

Originally Posted by wanderlust42

I hadn't considered that but it's a great point--now I'm even more convinced that conventional advice isn't necessarily savvy advice.

Precisely!

I don't think appreciation/depreciation is relevant to this analysis. Pick your boat, pick your price, pick your period of time of boat ownership before selling it at a terminal value which is less than what you paid for it due to depreciation . . . it doesn't matter what assumptions you make. If you can leverage an asset (even a depreciating one) as collateral to borrow money at a cheaper effective rate than what you can make on investment returns, then financing is better than paying 100% cash. Either way you're going to incur the economic cost of the depreciation and maintenance over the term of ownership. So then it's a question of whether or not to keep the 75-80% cash, pay interest on it, but earn more from investing it than what you pay in interest. That "profit" can help offset the cost of depreciation and maintenance.

Sounds like you've got all figured.

wanderlust42 · 17-12-2013, 18:17

I believe I have the basic financial theory figured out, but I'm applying it to a realm in which I have no practical experience . . . so I'm trying to flush out any gremlins from everyone's real life experiences that I may be missing.

wanderlust42 · 17-12-2013, 18:21

Quote:

Originally Posted by Sam Plan B

You will be limited to about 30% of your equity position.

That's really good to know, thanks!

cheoah · 17-12-2013, 18:22

Quote:

Originally Posted by wanderlust42

Hi everyone, I've been a longtime lurker/knowledge absorber on CF as I prepare for the next phase in my life . . . which will hopefully involve breaking my ties with a land-based life, buying a sailing home, and cruising around indefinitely until the time ever comes for something different.

So, with my very first post, I'd like to challenge some conventional wisdom that I often see repeated but I personally haven't ever been able to accept as true--and that is the notion that it is generally not a good financial practice to finance the purchase of a boat. The common advice is to pay cash for a depreciating, non-profit producing asset.

But in today's low interest rate environment, coupled with a US tax deduction for interest paid on a boat loan if it's also your home, it seems to me that putting 20-25% down and then financing the remainder at a low fixed interest rate can be a financially prudent decision if you take the other 75-80% of the cash that you would have used to purchase the boat and put it to work in other investments. Basically, if you can achieve a higher rate of return on your investments than the after-tax interest rate you are paying on the boat loan . . . then why wouldn't you finance? Depreciation doesn't answer that question . . . you'll incur the same depreciation on the boat under either scenario.

What am I missing? I'll be faced with a decision in a couple of years to pay cash or finance a used ~45' catamaran in the $400k-$600k range and I just can't see why in the world I would plunk down 100% cash up front instead of leveraging 75-80% of that amount over the term of a 10-20 year boat loan.

Thanks in advance for your thoughtful responses!

Yes, I agree with you. I financed a 20+ year old boat through conventional boat finance, put 20% down. It was the only and best approach to a very long term purchase and plan for us, and you have highlighted the benefits. There is no additional security on the boat, but no doubt you will need to show excellent credit and excellent liquidity, especially for a half million dollar boat.

GILow · 17-12-2013, 18:42

Quote:

Originally Posted by wanderlust42

I believe I have the basic financial theory figured out, but I'm applying it to a realm in which I have no practical experience . . . so I'm trying to flush out any gremlins from everyone's real life experiences that I may be missing.

OK, I REALLY do not want to come across as a negative old fart here, so please take this as a genuine response to you, without knowing anything about you. So this is not supposed to be some backhanded criticism or smarmy, or patronising... but...

Yeah, there's always a but.

I work in the financial planning sector. Have done so for ten years or more. Not as an accountant, or an investment advisor or anything really remotely to do with the money side actually, but as an IT Manager.

But, again and again the advisors describe this syndrome, and it's hard for me to explain as I don't have the terminology (same as I don't have a lot of the boat terminology on CF) where people come in CONVINCED they have it all worked out. But they don't really. What they have worked out is what they WANT to work. Because they DON'T have any practical experience. And then they build this set of logical steps up to justify how it all will work, and they simply don't hear the stuff that says it might not work.

I am not saying you are like this, I don't know you from a bar of soap, but after getting this in one ear for over ten years from my very respected work mates, I hear these plans and I worry for you. Are you doing the same thing?

Now really, I should shut up, because I DON'T know your situation at all, but I do think it would really help to seek out a financially gifted negative old fart (a bit like me but with financial savvy) and LET them tear apart your logic. And let them do it while trying really hard to keep an open mind to what they are saying.

Good luck, seriously,

Matt

wanderlust42 · 17-12-2013, 18:51

No offense taken--that's exactly what I'm looking for is for somebody with practical experience to tear the theory apart and shower me with real life examples of reasons why the logic doesn't work or how it's been tried and failed.

So . . . Bueller? Bueller?

wanderlust42 · 17-12-2013, 19:00

And I suppose it's worth acknowledging that there is a certain amount of risk involved in the financing and investing theory--because it only works if your investments do actually outperform your interest rate. You'd definitely want a comfortable level of liquidity and a long-term ownership horizon to smooth out any bumps in short-term investment performance.

GILow · 17-12-2013, 19:03

Quote:

Originally Posted by wanderlust42

No offense taken--that's exactly what I'm looking for is for somebody with practical experience to tear the theory apart and shower me with real life examples of reasons why the logic doesn't work or how it's been tried and failed.

So . . . Bueller? Bueller?

Try an accountant.

**StuM** · 17-12-2013, 19:04

Bottom line: If the cost of financing is lower than the net return on investments, then finance. But check the effect of things like tax on investment income to make sure that the NET return is in fact higher than the finance costs.