To Invest or Not to Invest: Buying a Sailboat for Charter Management
Ah, the age-old question that has been floating around in various circles and conversations for the past two years: Should one invest in purchasing a sailboat and renting it out for charters? Even individuals who have never stepped foot on a boat find themselves pondering this query, enticed by rumors of its lucrative potential. Everyone seems to rave about it being a sound investment, so it would be unwise to overlook such an opportunity. Picture it—a boat of your own, generating additional income. I don’t want to be left on the sidelines, I think to myself. You’re probably familiar with the concept of “herd mentality,” where everyone follows the crowd. It reminds me of the early days of the pandemic when everyone was panic-buying flour and toilet paper. Against all logical reasoning, I ended up with 50kg of flour gathering dust in my pantry as a reminder of that impulsive decision.
But let’s steer our focus back to the main topic at hand—should you invest in a boat? In my humble opinion, the answer is a resounding NO. If you choose otherwise, chances are you’ll end up losing money.
Unraveling the Numbers
Now, why do I stand against following the crowd and dampening people’s enthusiasm, alongside a few other skeptical voices? Some crafty boat salespeople claim that you don’t need to invest a significant sum of your own money. They say a down payment of 15-20% is sufficient to make the boat yours. For around 30-40k€, you could have a boat worth 200-300k€, with an estimated return on investment in 6-7 years. But hold on, there’s more. They tout the bonus of inflation, which supposedly increases the boat’s value each year, enabling you to pay it off in just 3 years.
Let’s be honest here—some folks have profited and swiftly recouped their investment. Some even engaged in shrewd trading of production slots, securing early leases and selling them later at higher prices. However, in my opinion, that ship has sailed. Those who venture into this investment now are taking on substantial risks. Before I present my argument in detail, let’s examine what led to the situation where buying a boat became an enticing investment decision. There are several factors at play, so let’s delve into them.
First, let’s delve into the numbers. In 2018, there were around 6,000 boats registered for charter activities in Croatia (with the majority being sailboats), which generated approximately 90,000 bookings (typically for a 7-day period). When we crunch the numbers, it turns out that, on average, each boat had 15 bookings, or weeks of rental. Those in the know understand that 18 bookings are the minimum needed to cover the boat’s expenses, or 22 to be on the safe side. The number of rental weeks varies depending on factors such as the investment made, marina fees, charter management fees, and the rental price achieved.
Now, if we divide the total number of bookings by the number of boats, even novice investors can see that the math doesn’t quite add up. A boat that only operates for 15 weeks but requires 18-22 weeks to break even is clearly in the red. In other words, it will take much more than 6 years to turn a profit. In 2018, some boats managed to make a profit, but the majority operated at a loss, with an average negative balance. Why? Simply put, there were too many boats on the market.
Unraveling the Magic Behind the 22 Rental Weeks Per Boat
Due to the excessive number of boats, major charter companies decided to relocate 2,000 of them from Croatia to other destinations such as Turkey, Greece, and the like. This decision brought the average number of rental weeks per boat to a magical 22, making the charter business profitable. Coincidentally, this happened alongside the emergence of a new factor that significantly impacted investment opportunities—COVID lockdowns.
At the end of 2019 and the beginning of 2020, Croatia experienced a decline in boat numbers due to the lockdowns and their associated challenges. During that time, everything came to a halt, and boatbuilders significantly scaled back their production, which had been operating at full capacity to meet the growing demands of the global charter business and the aftermath of Hurricane Irma, which had devastated the Caribbean fleet (particularly catamarans) that needed replacement.
With the arrival of the pandemic, boat owners faced headaches negotiating loan refinancing, selling their boats, and reducing marina expenses (as marina owners were merciless, demanding boat parking fees). However, these headaches didn’t last long. As the lockdown measures eased in late June 2020, the situation improved significantly. Firstly, all tourists scrambled to enjoy the remaining three months of the season, and secondly, isolated forms of vacationing became the safest choice during these uncertain times, despite the annoyance of mandatory face masks.
In 2020, the number of bookings didn’t reach the levels of 2019. However, the bookings that did occur were highly profitable due to the high demand, and discounts were not necessary. Hence, the season fared far from the disaster that had been anticipated.
So, let’s recap the three factors that led to the current situation. Firstly, there was a one-third reduction in the number of boats. Secondly, COVID caused a significant decrease in production. And thirdly, optimism returned to the charter business towards the end of the season.
What followed was only logical. Driven by optimism, charter companies began seeking more boats, and banks supported this spending frenzy by distributing “helicopter money.” However, the supply of boats was insufficient, as production had been scaled back. When supply is limited but demand is high, prices skyrocket. This led to speculations and reselling of slots. However, this tale doesn’t concern the average investor or boat owner, although they may still benefit from it.
Forecasting the Future: A Turn in the Tides for 2023
Although the beginning of 2021 was still clouded by the pandemic, the situation improved with the arrival of spring. Those who had abstained from vacations rushed to the sea and boats, disregarding the cost. The numbers were staggering, and profitability reached new heights. Charters were breaking records, and boat owners didn’t need to offer discounts due to the high demand. By the end of 2022, it became clear that we had more boats than we could rent out. All these factors contributed to the fervor of investing in charter management. However, as we enter 2023, the good times seem to be coming to an end, and the rollercoaster, in my opinion, is about to go downhill. Those who entered the investment in 2022 or plan to embark on it in 2023 may find themselves in an unfavorable situation. Let’s return to the decision of whether to invest. To make that call, we need to peer into the future and consider what the nautical business will look like in Croatia in 2023. So, let’s go step by step. Firstly, the number of boats available for charter has significantly increased compared to the approximately 4,000 in 2020. This means that the supply has grown. However, these boats were procured at much higher prices, resulting in a substantial hike in rental costs—up to 50% compared to 2019. Therefore, we now have more boats available but at considerably higher rental prices.
We must also take into account the other side of the economic equation: demand. Demand is expected to decline for three reasons. Firstly, as a rule, as prices rise, demand tends to fall. Secondly, in the past two years, the season was considerably shorter due to lockdowns, and people chose Croatia as the closest, safest, and most practical destination. In 2023, without any lockdowns and with a stable political situation in other nautical destinations, boating enthusiasts will have more options. And thirdly, the recession that has affected the countries from which most of our tourists originate will lead to a decrease in the number of arrivals. So, in 2023, the supply will be greater and more expensive, while the demand will be lower.
But what about profitability? Profitability depends on input costs, achieved rental prices, and financing. Input costs (such as the boat price, marina fees, services, etc.) have increased, just like everything else in the inflationary environment. Financing has become more expensive due to rising interest rates (except for those lucky ones with fixed rates). Remember, 70-80% of the boat purchase amount was financed through loans with interest rates as low as 2-3% during the “helicopter money” era.
The achieved rental prices should increase proportionally to the rise in input costs and financing to maintain profitability. All price lists for 2023 have been significantly adjusted to compensate for cost increases, and that should be acceptable. However, the trap lies in the average discount, which plays a significant role in the calculation. If it was assumed that discounts would remain at 2021/2022 levels, the calculations will not look favorable because the discounts will be significantly higher. The reason is simple: increased supply and reduced demand.
To summarize, there will be a decrease in the number of rental weeks due to lower demand, which will lead to reduced profitability due to higher discounts and increased financing costs. Do I need to explain further why it’s not worthwhile to invest in boats at the moment?
For those who haven’t ventured into the charter management business yet, let me provide you with a classic calculation.
On average, all costs amount to between 55-60% of the achieved rental price. The remaining portion should cover investment&financing. Some skilled individuals may negotiate better deals on certain items, but that’s the general idea. If all costs are covered, a 40% EBITDA (earnings before interest, taxes, depreciation, and amortization) isn’t bad. However, procentage is calculated based on revenue, and revenue depends on the number of rental weeks and achieved rental prices. By incorporating the number of weeks with the average weekly price into this model and comparing it with the capital investment, it becomes easy to calculate the return on investment.
Even the most optimistic scenario doesn’t look favorable for owners who purchased a boat in 2022 or 2023, or those planning to do so. Unless they finance it with their own money, they will likely need to inject operational capital each year to avoid being in the red, thereby extending the time it takes to recoup their investment.
But there’s a bonus we mentioned earlier that could improve the situation—boat value inflation. As we mentioned, the prices of new and used boats continue to rise each year. So even if you don’t make a profit from rentals, you could still benefit from the inflation of boat prices. However, this is already venturing into speculation about what might happen. If the aforementioned trends hold true, with an oversupply of rental boats and an unprofitable boat investment landscape, the demand for purchasing new boats will decrease, thereby stabilizing prices. In that case, I don’t see any opportunity for profit, quite the opposite—there’s a higher chance of losing money.
A savvy investor would think as follows: If charter management becomes unprofitable and financing, which played a crucial role in the calculations, significantly increases, many cheap boats will flood the market.
There’s a saying in a book about the stock market crash of 1928, which become a mantra I always go back to when someone gives investment advice:
“If you hear that even the daycare auntie has invested in it, run away from that investment as fast as you can!”
About the Author
Ivan Cevra is a business management expert with a wealth of experience in the corporate sector. After completing his graduate studies at the Faculty of Economics, he continued his education and earned an MBA degree from the prestigious IEDC Bled. With over 20 years of experience working in corporations, Ivan has emerged as a successful leader in executive positions.