Putting a boat into charter – is it right for me?
19 October 2017
Caroline Strainig talks to Mark O’Donoghue from finance company Finlease about the ins and outs of putting a boat into charter.
It sounds almost too good to be true: buy your dream boat for only 20 percent down, get the bank to pay the balance and have someone else take care of all the maintenance and running costs. You could even potentially receive a return on your investment higher than your savings would earn you in the bank.
Yes, welcome to charterboat land. And if it sounds too good to be true, it isn’t, but you do need to do your homework and make sure it is the right investment for you.
For some expert advice, I turned to Mark O’Donoghue, the CEO and founder of Finlease.
What income do you need?
Firstly, can anyone do this? Or do you need a certain level of income?
Mark says as a rule of thumb a charterboat buyer looking to finance $400,000 via a traditional boat loan would have a taxable income in the order of $200,000 (either individually or jointly with a partner) and sufficient surpluses to service the debt.
“Finance companies do not rely on the actual charter income from the boat when looking at servicing for these loans,” Mark explained.
“The income from the charterboat will also vary during the year because of high and low seasons and potential buyers need to have sufficient surplus cash flow to service any dedicated debts during the times the boat is working less.”
He says it is important to be conservative in terms of expected income when budgeting, which will ensure most surprises are pleasant ones.
“And, of course, allow for economic head winds, whether that is a cyclone, an airline pilot strike or a significant downturn in the economy, even though these are usually only temporary setbacks in the context of a long-term business plan,” he said.
For those with individual incomes under $250,000 the loan can be negatively geared like an investment unit provided it meets the criteria of a business as set out in the specific Charter Boat Ruling set out by the ATO. However, for those with individual incomes over $250,000, it is treated more as a hobby-type investment due to recent changes in tax law.
There several accounting firms who specialise in this area and Mark suggests engaging one as part of the process.
Do your research
Okay, so you qualify income-wise. Where to next? Research, research and more research. Mark says one of the most common mistakes potential charterboat owners make is not doing adequate due diligence up front, including speaking to current owners about their experiences.
“Although a charterboat by nature is an attractive and often emotional asset, it does need to be a business and approached in that manner,” Mark said.
“By speaking candidly with existing owners, it is a relatively easy task to obtain a full understanding of the charterboat industry and its nuances and to obtain full transparency on past boat performances and charterboat operator performances.
“Any reputable charter boat operator will gladly provide a list of their current owners so potential charterboat buyers can do this research.”
Multihull Solutions staff also know the industry well and can put you in touch with charterboat owners and steer you towards charter companies they have had good feedback about. They can also provide you with a wish-list of models those companies are looking for investors to purchase so they can add them to their fleets. At the moment this includes Charter Yachts Australia, Cumberland Charter Yachts and Whitsunday Escape.
The charterboat industry today
And what about the status of the charterboat industry? Is there a demand for new boats, and are they getting plenty of work?
Mark said the charterboat industry is not what it was before the GFC and the ATO blitz on owners using the industry to finance their hobby rather than running a legitimate business, but this has had a plus side for investors.
“At its peak there were more than 200 charter boats in the Whitsundays, but today there are only 150 boats, and this is an ageing fleet,” he said.
“The smaller fleets mean each boat gets more work, which ensures a higher return on your investment.
“It is not rocket science to understand that a smaller number of available boats and an increased demand because of the low Aussie dollar bringing more tourists to our shores result in greater returns for the existing fleets.
“It is not uncommon now for boats in the Whitsundays, for example, to be providing their owners with an annual return in net income in the order of 8 to 10 percent.”
Mark said the ageing of the fleets is also a significant factor.
“In an ideal world, charter operators would like to see age of the boats in their fleet to be under 10 years and ideally under eight years,” he said.
“The entire Whitsunday fleet ages by one year every year, so 18 boats need to be replaced annually to retain an average age of eight years, let alone to keep up with increasing demand.”
Access to your boat
What about “me” time on your boat though? You don’t have unlimited access as if you had exclusive use.
Mark acknowledged there is a price to pay in that the charterboat is not available for convenient use in the same way as a private boat would. However, he says surveys show the average boat owner uses their boat only 30 days a year, and you get more usage than that in a charter fleet.
“Another huge plus on the pro side is that all the maintenance work is organised by the charter company, so all you must do is turn up and enjoy your boat,” he said.
“As any boat owner will tell you, buying the boat is only the first step and there is ongoing maintenance and work that you must budget for.”
And, of course, there’s that potentially very attractive bottom line.
“If the equation is that a private boat costs you on average $30,000 a year compared to a charter boat earning your $50,000 a year there is a little room to put up with some inconveniences,” Mark said.
“Think about it as the difference between a weekend cottage in the mountains compared to an apartment at Noosa.
“The weekender needs constant maintenance and often goes months without a visit. The Noosa apartment is in a letting pool, earns money when you are not using it and when you do it is clean and ready for you as a guest.”
For more information
Finlease’s website is a great place to start your journey– www.finlease.com.au Mark O’Donoghue is also happy to talk to potential charterboat investors. You can contact him on email email@example.com, ph 02 8404 2000, mobile 0412 320 872.
Multihull Solutions staff can also give you great background information, help steer you towards preferred charter operators and provide you with a full wish-list of models charter fleet operators are looking for investors to buy so they can add them to their fleets. Contact our team today to find out more.
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