9th Jan 2020
Things you should know about buying property
Buying a property is pretty exciting. For most yacht crew property purchase is top on their list of financial goals. This makes sense, right? Get your foot on the property ladder as soon as possible and start building a future on dry land.
Property can be a wonderful investment for yacht crew. It can provide a real sense of stability whilst offering a passive revenue stream if you choose to rent it out whilst you are onboard. We are not here to tell you if a property purchase is right for you. Our goal is to share the key considerations, and occasional pitfalls, which come with investing in bricks and mortar.
What is a ‘good’ investment?
Ethics aside, a good investment is one that brings you more money than you originally invested.
The table below shows how much you could contribute to your personal savings by putting aside 20% of your monthly pay. This can serve as a good comparison for the returns you expect to get from your property.
|Position||Contribution to savings over 20 years
|Total savings after 20 years based on 5% annual return
Source: Providence Life Limited
Any investment type will come with costs. Even if you (unwisely) chose to dig a hole and bury your money, there would be an associated cost. Your gold or currency would lose value with inflation with no interest payments to counterbalance it.
This is why it is so important to consider the total costs that come with investing in property.
Total costs when buying a property
These will vary from country to country but you can generally expect:
- Solicitor fees
- Survey costs
- Mortgage costs (interest rate)
- Currency costs when converting the deposit
- Maintenance costs
- Agency fees
- Deposit (as you can’t invest this money elsewhere and gain interest)
When calculating potential returns on a property it is easy to see the temptation to invest.
You purchased a property for €100,000 and after 30 years it is worth €300,000.
On the surface, a €200,000 profit looks pretty good. But when you look closer at the numbers:
|Your original mortgage||€100,000.00|
|Mortgage interest you’ve paid at 5% over 30 years||€92,422.95|
|30 years taxes and insurance at €2,000 a year||€60,000.00|
|Maintenance, repairs & upgrades average roughly 1% of the purchase price per year (€1,000 a year for 30 years)||€30,000.00|
Then if you start taking inflation into account, which has been around 1-2% over the last few years, you start to see very little profit from the investment.
This isn’t to say that yacht crew property investment is a bad idea. Often, property can provide crew with much-needed stability for their lives back onshore. It can also be an effective way to generate an additional income whilst onboard or as a way to support family back home. Also, owning your own property stops you from having to pay rent to someone else!
A detailed explanation of how to calculate all the costs and returns is shown in the video below:
And if you’ve paid off your mortgage?
Then you are effectively saving the equivalent amount of rent each month. So, whilst you will still have all your insurance and maintenance costs, will have the income you would have been using to pay the mortgage to invest.
You can also now add the house as an asset on your personal balance sheet. This can feel pretty nice. And if you move, or downsize, then you can invest any additional equity.
Everyone likes to think that they will buy low and sell high. This might not be the case. The value of your house, just like other investments, can go up as well as down.
I don’t plan to live in the property, is it a better investment for crew?
This can be a better way for yacht crew to invest in property, especially when they are on charter. This is because you aren’t paying off the mortgage, someone else is. If we take the same property from the previous example:
You put a deposit down on the property, say €20,000.00, financing the remaining cost over thirty years.
The money you receive from renting the property pays for the mortgage repayments, and annual taxes, insurance, repair and upgrades. To protect your investment over the term, you increase rents annually in line with inflation and tax increases.
After 30 years, your property is worth €300,000.00 and, in this instance, represents an annual return of 9.4% on your original €20,000.00 deposit.
Let’s assume you always have tenants, and because your tenants pay you more each month than it costs to own the home, your income versus expenditure nets you a modest income of around €150 a month, giving you an additional €54,000.
You should calculate what would happen should your property remain vacant. How much would this cost you? How much would the insurance increase? Could you pause your mortgage contributions?
If you are planning on staying in yachting this could be an attractive investment if you are sure of the returns, and that the property isn’t at risk of depreciating in value. It is worth taking time to evaluate the market and the expected rental returns and risks. For example, a few low maintenance properties can be better investments than a larger luxury property. Or vice-versa depending on where you live.
YAcht crew + property = good idea?
There is no simple answer to this one. Quite simply it depends on where you live and what you want your property for.
This is why it is worth taking the time to consider your investment, especially with regard to the rest of your financial plan.