Sail Cruising - Finance or Own Boat?

[sailorboy1]

Originally Posted by scoobert

if you buy the boat outright, they cannot take it if you lose the house.
however when they sell the house, the debt is gone.

I had a neighbor back during the last bubble that took out an equity loan and used it to buy a rental unit. He later defaulted and lost the house when the bubble burst.

Now he has a rental unit with more equality in it as he doesn't have to pay back the loan he used to buy it.

[BattleDuck]

Originally Posted by TacomaSailor

Here is a concrete example of what FlyMeAway described:

...

Here are some assumptions for a simple example

IGNORE – Inflation and operating costs of boat

15 year mortgage 20% down 4.25% interest (current BofA boat loan)

Cost of boat $160,000
Down Payment $32,000
Amount financed $128,000
Payment = $963 per month

Investment makes 7% above inflation – a rate our investments have exceeded for over 40 years

....

Well first of all, ignoring inflation would be foolhardy. Interest rates have to rise again, they must. And 15 years is a long time for them to rise.

And second, the average person is not going to make 7% above inflation.

[scoobert]

Originally Posted by TacomaSailor

Investment makes 7% above inflation – a rate our investments have exceeded for over 40 years

i have been investing for 8 years now, with day trader status.
the only time you can crest 4% is with high risk trading.
EG:
city bonds (LA used to pay 10%)
uncovered options: huge risk, even if you can say you have a system.

your best bet is a stock like DRI, i love walking into a capital grille and know i know the place.

[TacomaSailor]

I guess a lot of folks are skeptical and find it hard to believe that careful management of debt and the use of leverage can lead to positive results.

I can understand why they might believe that.

What I also know is that I retired when I was 50 and went cruising. I am still retired 16 years later and have far more money now than when I retired at age 50 - even after the worst financial down turn since the great depression.

I have made a lot of dumb investments and a few very smart investments. I have managed a lot of our personal debt over the last 45 years. We also had a lot of financial discipline and restraint.

If you do follow a few simple rules and don't get greedy you can make a lot of money with leverage and borrowed money.

Believe it or not - makes no difference to me but retirement has been good and we have no financial concerns about our future.

[Doodles]

Originally Posted by TacomaSailor

I guess a lot of folks are skeptical and find it hard to believe that careful management of debt and the use of leverage can lead to positive results.

I can understand why they might believe that.

What I also know is that I retired when I was 50 and went cruising. I am still retired 16 years later and have far more money now than when I retired at age 50 - even after the worst financial down turn since the great depression.

I have made a lot of dumb investments and a few very smart investments. I have managed a lot of our personal debt over the last 45 years. We also had a lot of financial discipline and restraint.

If you do follow a few simple rules and don't get greedy you can make a lot of money with leverage and borrowed money.

Believe it or not - makes no difference to me but retirement has been good and we have no financial concerns about our future.

My situation is very similar except I did it without any debt. To each his own I guess.

[TacomaSailor]

Originally Posted by scoobert

i have been investing for 8 years now, with day trader status.
the only time you can crest 4% is with high risk trading.
EG:
city bonds (LA used to pay 10%)
uncovered options: huge risk, even if you can say you have a system.

your best bet is a stock like DRI, i love walking into a capital grille and know i know the place.

A day trader is NOT an investor - he is a rumor monger and gambler. There is no similarity between my investment strategies and those of a day trader. My brother and my best sailing friend were both very serious and dedicated day traders, each for over five years and they made little money trading (net for five years) and a lot of money investing.

It is very simple to clear 7% above inflation over relatively short time frames - just pick a few solid mutual funds with low costs and overhead.

For example here are Morninstar published returns:
Invesco Diversified Dividend Fund
1 year - 23.9%
3 year - 17.0%
5 year - 9.1%
10 year - 8.6%

Oppenheimer Equity Income Fund
1 year - 27.6%
3 year - 17.9%
5 year - 10.0%
10 year - 9.6%
Since inception in 1985 - 11.6%

Royce Premier Fund
1 year - 16.8%
3 year - 15.5%
5 year - 6.5%
10 year - 11.8%
Since inception in 1985 - 12.4%

There are a lot of funds that make those returns over the long haul. I keep 2 years cash requirements in liquid and conservative bond funds and move the rest to the long term funds with a long history of great returns.

It is not hard

[TacomaSailor]

Originally Posted by BattleDuck

Well first of all, ignoring inflation would be foolhardy. Interest rates have to rise again, they must. And 15 years is a long time for them to rise.

And second, the average person is not going to make 7% above inflation.

The reason I said "ignore inflation" is the impact of inflation is positive for the person who borrows and negative for the person who owns real assets.

During times of high inflation I pay off loans with inflated (less valuable) dollars and the rate of nominal return for most financial assets increases at least at the rate of inflation.

My request to ignore inflation was to not overwhelm the non-financial reader with details and to not appear to overstate the case for using wisely and carefully borrowed money.

PS - I also rent real estate just like I rent money - why own the asset and be responsible for it's upkeep, tax, and sale when you can just rent it?

This is way off topic for a cruising forum - I like renting money and have been very successful doing so. I am comfortable with the use of borrowed money and have the analytic skills and tools to make careful judgments about those borrowings.

If others don't agree with me or are not comfortable with the use of leverage - that works just as well for me.

My parents were quite successful in their financial lives, but, since they grew up during the great depression they hated debt. We talked about it constantly and I understood and appreciated their position but felt they were technically wrong.

I guess 7% seems way too high for many readers - well maybe it is but we have 35 years experience with far higher returns. Well documented and repeated decade after decade.

[valhalla360]

Originally Posted by TacomaSailor

I guess a lot of folks are skeptical and find it hard to believe that careful management of debt and the use of leverage can lead to positive results.

I can understand why they might believe that.

What I also know is that I retired when I was 50 and went cruising. I am still retired 16 years later and have far more money now than when I retired at age 50 - even after the worst financial down turn since the great depression.

I have made a lot of dumb investments and a few very smart investments. I have managed a lot of our personal debt over the last 45 years. We also had a lot of financial discipline and restraint.

If you do follow a few simple rules and don't get greedy you can make a lot of money with leverage and borrowed money.

Believe it or not - makes no difference to me but retirement has been good and we have no financial concerns about our future.

You had to wait until 50? We headed out at 37 after getting debt free.

You may have gotten lucky but it's not a great plan.

[TacomaSailor]

"You may have gotten lucky but it's not a great plan."

Since 1975 - it has been a good string of luck!

It doesn't matter to me if it is luck or skill or a combination - it has been working well for my wife and I for the last 35+ years.

My sister is a cash only / gold bug - she lives day to day most of the time but has no debt - that makes her happy!

We have manageable debt and a lot of investments to service that debt. Our investment income far exceeds our debt payments so that makes me happy. As time goes by - our NET worth increases - that really makes me happy!

Just to be clear - we have NO credit card and NO home equity debt. We have never made a credit card interest or penalty payment.

Our debt is long term/low interest and we always have sufficient liquid assets to payoff the debt if it becomes necessary.

Bottom line - IF a bank will rent me money at 4% to buy a boat and I can keep my own money invested at 10% - I would be a fool to not take the 6% spread for my personal advantage. Many of our investments are pre-tax so we pay no taxes on the 10% - 20% annual growth and we do write off the 4% interest at a 25% marginal rate so the boat loan is only costing me 3% compared to the +10% I am making on the money I did not spend to pay cash for the boat.

The cash or debt issue is personal preference and is probably not worth discussing - debt has worked well for me for a long time and that is all I really care about.

[valhalla360]

Originally Posted by TacomaSailor

"You may have gotten lucky but it's not a great plan."

Since 1975 - it has been a good string of luck!

It doesn't matter to me if it is luck or skill or a combination - it has been working well for my wife and I for the last 35+ years.

My sister is a cash only / gold bug - she lives day to day most of the time but has no debt - that makes her happy!

We have manageable debt and a lot of investments to service that debt. Our investment income far exceeds our debt payments so that makes me happy. As time goes by - our NET worth increases - that really makes me happy!

Just to be clear - we have NO credit card and NO home equity debt. We have never made a credit card interest or penalty payment.

Our debt is long term/low interest and we always have sufficient liquid assets to payoff the debt if it becomes necessary.

Bottom line - IF a bank will rent me money at 4% to buy a boat and I can keep my own money invested at 10% - I would be a fool to not take the 6% spread for my personal advantage. Many of our investments are pre-tax so we pay no taxes on the 10% - 20% annual growth and we do write off the 4% interest at a 25% marginal rate so the boat loan is only costing me 3% compared to the +10% I am making on the money I did not spend to pay cash for the boat.

The cash or debt issue is personal preference and is probably not worth discussing - debt has worked well for me for a long time and that is all I really care about.

I wish you well and hope your luck holds out but I wouldn't recommend your plan.

[FlyMeAway]

The ability to earn *better* rates of return on the interest is not the only reason to finance -- in fact, if you are banking (ha ha) on earning a rate of return a lot better than the interest rate, I would say you are extremely optimistic. However, with rates as low as they are the chances of you getting close to break-even financially in the mid-term, even with conservative investments, is pretty good.

I have an MBA and a law degree and have helped teach financial planning classes pro bono. One of the core tenets of such planning is that it can be financially irresponsible not to take on debt, especially if it means you are significantly depleting your savings. It is difficult for many people, especially people who are just coming into prosperity for the first time, to understand this. That isn't to say that the wacky, out-of-control debt of the past 15 years is a good idea, but rather that debt in moderation is one of the best financial planning tools you can have. There's a reason that nearly all businesses are run on some form of credit, both short and long-term.

There have been a few folks on here who say something along the lines of "not having debt makes me feel free" or "taking on debt to buy the boat seems risky." Responsible debt is far *less* risky than not taking on any at all, and reducing your cash position substantially limits your options in the event of a crisis. Look around on the forum, or around the world, and you'll see all sorts of examples of people "forced" to sell because some life emergency or broken boat requires them to do so. First, forced sales under adverse circumstances rarely allow you to get the full value for your boat! If you have the cash to fix the boat you're going to be able to sell it for more fixed than not fixed, probably more than the cost of repair. Second, a life emergency may require cash which you can deplete and then replace by working, but if you have to sell your boat it will be difficult to replace.

I want to clear something else up, too. I'm absolutely *not* advocating buying a boat you can't actually afford merely because you can buy it on credit, or buying a boat before you've saved up the money to buy one. What I *am* saying is that even if you've just saved $300k to buy the $300k boat of your dreams, and have another $50-100k in the bank to fund your cruising kitty, consider taking out a $150 or $200k loan and keeping more cash on hand. Even if you balance sheet is positive, interest rates are low -- the rule of thumb should be to keep as much cash on hand as possible.

[valhalla360]

Originally Posted by FlyMeAway

The ability to earn *better* rates of return on the interest is not the only reason to finance -- in fact, if you are banking (ha ha) on earning a rate of return a lot better than the interest rate, I would say you are extremely optimistic. However, with rates as low as they are the chances of you getting close to break-even financially in the mid-term, even with conservative investments, is pretty good.

I have an MBA and a law degree and have helped teach financial planning classes pro bono. One of the core tenets of such planning is that it can be financially irresponsible not to take on debt, especially if it means you are significantly depleting your savings. It is difficult for many people, especially people who are just coming into prosperity for the first time, to understand this. That isn't to say that the wacky, out-of-control debt of the past 15 years is a good idea, but rather that debt in moderation is one of the best financial planning tools you can have. There's a reason that nearly all businesses are run on some form of credit, both short and long-term.

There have been a few folks on here who say something along the lines of "not having debt makes me feel free" or "taking on debt to buy the boat seems risky." Responsible debt is far *less* risky than not taking on any at all, and reducing your cash position substantially limits your options in the event of a crisis. Look around on the forum, or around the world, and you'll see all sorts of examples of people "forced" to sell because some life emergency or broken boat requires them to do so. First, forced sales under adverse circumstances rarely allow you to get the full value for your boat! If you have the cash to fix the boat you're going to be able to sell it for more fixed than not fixed, probably more than the cost of repair. Second, a life emergency may require cash which you can deplete and then replace by working, but if you have to sell your boat it will be difficult to replace.

I want to clear something else up, too. I'm absolutely *not* advocating buying a boat you can't actually afford merely because you can buy it on credit, or buying a boat before you've saved up the money to buy one. What I *am* saying is that even if you've just saved $300k to buy the $300k boat of your dreams, and have another $50-100k in the bank to fund your cruising kitty, consider taking out a $150 or $200k loan and keeping more cash on hand. Even if you balance sheet is positive, interest rates are low -- the rule of thumb should be to keep as much cash on hand as possible.

It's a bad idea to buy a boat equal to the value of your savings regardless of if you take out a loan or pay cash. It may be core to "your" approach to take on debt but it is hardly a universal truth as you imply.

From a financial perspective, it's a bad idea to leave the working world without enough cash on hand to buy the boat and cover ongoing living expenses. Buying on credit doesn't help the situation. (Admittedly, a great many cruisers go out with no care for the financial implications).

If you actually have enough, it doesn't gain you much and increases risk and complication substantially.

[FlyMeAway]

Originally Posted by valhalla360

It's a bad idea to buy a boat equal to the value of your savings regardless of if you take out a loan or pay cash. It may be core to "your" approach to take on debt but it is hardly a universal truth as you imply.

...

If you actually have enough, it doesn't gain you much and increases risk and complication substantially.

On the first point: if you read my post, the example I gave was having $400k in cash and buying a $300k boat. Even if you have $1M in cash and are buying a $300k boat, it still makes sense to finance -- and many very financially savvy people do just that.

On the second point, you are dead wrong. Financing almost always *decreases* your risk substantially. That is why you finance. Put another way: $400k in cash, a $200k loan, and a $200k boat is a lot less risky financial situation, by any objective measure of risk, than $200k in cash and a $200k boat debt-free.

The whole point of taking out a loan, generally, is that you are paying the bank money to share some of the risk. It is by its very definition less risky, which is why in the long run (assuming your cash does nothing) it is more expensive.

[Doodles]

Originally Posted by FlyMeAway

On the first point: if you read my post, the example I gave was having $400k in cash and buying a $300k boat. Even if you have $1M in cash and are buying a $300k boat, it still makes sense to finance -- and many very financially savvy people do just that.

And a lot of "very financially savvy people" have gone down in flames.

The whole point of taking out a loan, generally, is that you are paying the bank money to share some of the risk. It is by its very definition less risky, which is why in the long run (assuming your cash does nothing) it is more expensive.

The only way I see the bank taking any risk is if you are willing to walk away from the boat under some adverse condition, and the repercussions from that scenario are another risk that some would not take. You trade one risk for another.

[TacomaSailor]

This argument will never be resolved. There are "no debt - live free people" and "I will rent money from the bank and use it as appropriate and with caution" folks.

My sister and I both have graduate degrees and were successful in our respective professions. She wants no debt and lives via cash. I have some debt and never spend a penny of my money if someone will lend me money at a lower net rate than my investments will return.

My sister owns a house, car, and a lot of shiny gold. We do not own real estate or any other real assets and drive a 1993 SAAB.

My sister, with no debt is "house poor" and is constantly short of cash but is happy because she is free from any financial entanglement.

My sister is locked into a home she owns outright because the fair-market value is so low compared to what she thinks it is worth and compared to what she has invested in it. She would like to move but is unable to sell.

We just moved out of a very nice place we had rented for 10 years and moved 1200 miles to another very nice place that we will also rent. During the time we rented - house prices went up 30% and down 40%. The down payment we would have put into home ownership netted us over 10% positive return during that 10 years of renting.

Our current boat loan costs a net of less than 3% annual. We have about 80% equity in the boat and can sell it anytime we want because the net cash we would realize from the sale is small change compared to the value of our other investments.

The bank has no concern with where we take the boat and insurance is relatively cheap compared to other aspects of our life so the boat mortgage causes us no problems at all.

Folks here keep pointing out how unlikely it is that long term investments can be counted on to produce good results over the long haul. Others have pointed to luck and others have suggested that long term high return investing is just not likely.

When I won my first real job at age 27 I had a fair amount of student debt - equal to about a years income and owed money on a new car.

Twenty six years later after a lot of consistent long term investing I retired with an investment income not much less than my "working" income. Now - over a decade later and after a lot of nice retirement cruising and travel - our investments are worth a great deal more than when we retired.

Maybe I am just lucky!

I can understand that many want the "security" and "freedom" of home ownership and boat ownership with no mortgage. To me that security is a burden and anchor that prevents me from doing what I want to do. I want my money to be "free" to run around and make more of itself - not tied up in a boat that floats.

Enough said on my part.