When your ship comes in, Will you miss the boat? Net Worth Neutral Yacht Ownership – A "sea cha
In over 30 years as a consulting managerial economist and advocate of the affluent, many have asked:
Is a yacht ever a good investment?
Does owning a yacht ever make economic sense?
Can the yachting lifestyle ever be a prudent use of resources producing greater wealth and prosperity?
After a thorough and comprehensive risk: reward, cost: benefit analysis, the surprising conclusion for most is a resounding and unequivocal YES!
Or at least it can be - simply by applying only a few basic prosperity principles to yacht ownership: 1) as with any alternative asset, retain advisors with specific industry expertise, and 2) minimize expenses - especially taxes.
The good news.
Yacht ownership, while not for everyone, but for those with the calling, the passion and financial resources – properly structured and managed – can be one of the most rewarding of long term investments.
The bad news.
Very few yachting investments are properly structured and managed – subjecting yacht owners to unnecessary economic risk and resulting in needless financial loss.
Many yacht owners are unfortunately missing their rewards.
As a result of well meaning but misinformed advisors and based on erroneous assumptions, they mistakenly conclude it’s not worth it and abandon the yachting lifestyle entirely or they severely limit their investment to smaller yachts than they would have otherwise purchased.
Though already successful, nevertheless not only are these high net worth individuals “missing the boat” to even greater prosperity - literally and figuratively, but so are their loved ones, and society as a whole is less prosperous.
Amazingly, while yacht owners are financially astute, yet when it comes to yachts many adopt otherwise unacceptable professional practices and passively accept yacht ownership as a losing financial proposition.
It doesn’t have to be that way if they change their perception: from just the price of enjoying the yachting lifestyle to an actual yachting investment.
Profitable yacht ownership requires a radical change in expectations and the conventional "wisdom". To see change come to fruition often requires a prior “sea change” in thinking. You can’t keep doing the same thing, the same way, and expect improvement.
The conventional wisdom of traditional experts and advisors - tax, legal, financial and wealth managers, etc. (and even many yacht owners) is that a yacht purchase is not really an investment at all - but rather a luxurious “lifestyle expenditure”.
Charter is about the extent of their concept of yacht investments.
Offering a yacht for charter hoping to mitigate expenses is not an investment strategy or a business with a profit motive. For US citizens charter can often be little more than an IRS audit trap.
So while charter promises limited help with expenses, it offers no realistic hope of net worth neutral yacht ownership much less any meaningful long term profit. To make yachting a profitable investment – with rare exceptions - certainly requires more than just charter.
Thus most trusted conventional advisors are simply unable or unwilling to offer much assistance or encouragement – no matter what the potential rewards might be to the yacht owner.
Frequently advisors try to dissuade their clients from considering any yacht purchase or at least to minimize such and are quick to point out what they perceive as negatives and risks such as yachts are depreciating assets and quite expensive to maintain, etc.
However, yachting lifestyle investments are like other alternative investments in depreciating assets. Real estate – houses, condos, office buildings, as well as oil and gas wells are depreciating / depleting assets. Yet, when purchased and operated properly can be very lucrative.
Successful investors often rely on skillful professionals able to extract maximum value from assets that far exceed the depreciation / depletion - making for a profitable investment.
It’s the same for properly structured and managed yacht investments.
PROSPERITY PRINCIPLE #1: Net Worth Neutral yacht ownership, like any alternative investment requires specific expertise.
When considering investments in alternative assets of any kind: commodities, collectibles, real estate, horses, etc. it’s essential to retain advisors with industry specific expertise in that asset class - perhaps all the more so with yachts.
In order to increase the certainty of generating superior risk adjusted yields from yachting investments, the need for asset class specialists familiar with the unique characteristics of, and opportunities for, profitable yacht investments may be even more critical than for other alternative asset investments.
Yet very few advisors and wealth managers have any experience with profitable yacht ownership.
Few know how to make yacht ownership profitable or have any incentive to. In fact, most consider it a threat or liability and are actually prohibited from even expressing an opinion on any alternative investments – especially yachts!
Frankly, the perspective of most conventional advisors, overseeing the profitability of their clients’ yachting lifestyle is: 1) it’s not part of their professional expertise, 2) they lack the necessary skills, 3) they lack the time and resources, and 4) they aren’t compensated for such.
Yet to be fair, there are valid reasons why yacht owners can’t rely upon their most trusted advisors – no matter how competent in their disciplines - to help make yacht ownership profitable.
The intricacies of profitable yachting are beyond the competencies and expertise of the advisors. It is not what they are trained to do.
Furthermore, many advisors are increasingly overwhelmed by the expanding regulatory environment and unable to focus adequately on the potential impacts upon the yachting lifestyle. It’s difficult to remain proficient in their profession, so finding ways to make the yachting lifestyle profitable is not a priority for most experts.
For example, the U. S. Code of Federal Regulations has ballooned from 71,224 pages to over 174,545 and growing. In only ten years, the federal government issued over 38,000 new rules and regulations. It’s worse in other countries.
Overwhelming regulations are just the beginning.
Malpractice concerns prohibit prudent attorneys and financial advisors from even expressing opinions on “investments” not offered or sanctioned by their company and for which they are not qualified to discuss since they have no specific expertise.
Accountants aren’t much help either when it’s all they can do to keep up with the changing tax codes. Federal reports reveal over half of all US taxpayers overpay their taxes by not taking advantage of available tax provisions.
Shockingly, over 89% of those overpaying taxes use tax professionals: CPAs and accountants.
Congress has reported that less than half of eligible taxpayers take advantage of specific income tax provisions because paid tax professionals don’t know about key changes in the tax code, don’t think their clients will benefit, or use preparation software leading them to believe there will be no benefit.
The IRS has revealed that less than 1% of those earning more than $1,000,000 take advantage of all available provisions in the tax code. The greater the income, the more they over pay.
Tests of tax professionals prove they make huge mistakes on even simple tax returns producing results that vary by 100%. This suggests some pay twice as much as they owe. It makes one wonder about the variance in complex tax returns.
Overpaying taxes can cost millions of dollars over the long run. In addition to the actual dollars over paid in tax the first year – it’s also what those tax savings would have earned if they had been properly invested.
Depending on the forgone investments and years of compounding, the opportunity cost from years of overpaying taxes can be substantial. Obviously, the greater one’s income, the greater potential to overpay taxes – and the greater one’s access to high yielding investments - the greater the opportunity cost!
For example, a recent study at the University of Illinois at Urbana-Champaign calculated that a hedge fund manager with George Soros’s track record who started with $12 million from investors, took 20 percent of the profits, and reinvested implementing available tax provisions, would end up with $15.9 billion. If that same manager had overlooked those special tax incentives and paid the taxes on the fees and related investment gains before reinvesting them, the figure would shrink to only about $2.4 billion.
So what is more important – investment decisions or tax decisions?
I suspect you may be doing a quick mental calculation wondering if you over pay your taxes and how much it’s cost you over the years.
If CPAs disagree on relatively simple tax returns, could your team of advisors be overlooking something in your sophisticated ventures?