Purchasing the Luxury Sailboat of Your Dreams:
How to manage your financial exposure

By Barry Knight, Private Wealth Advisor, Merrill Lynch

You inhabit the land of 10,000 lakes, so it's no surprise that the idea of purchasing or upgrading your sailboat might be on your mind. In fact, chances are you may have researched dozens of brochures, attended numerous boat shows and already have your eye on that luxury sailboat of your dreams.

And why not? You work hard, and for some of us there is no better investment than spending time out on the water with our family and friends, or long weekends alone at the dock polishing every last bit of chrome.

But when it comes to your finances, the money you will spend on your boat should not necessarily be viewed as a good financial investment. Sailboats start depreciating the minute they leave the showroom. And the cost of maintenance, gas, dock fees, storage, insurance, and any number of financial surprises along the way can really add up.

Nonetheless, the emotional and personal rewards from owning your boat are many, and so you just want to make sure you consider this purchase in the context of your overall financial picture and find ways to best manage your financial exposure.

Here are a few questions you should consider to help you navigate the purchase of the sailboat of your dreams.

What Type of  Boating Activity Will You Be Doing?

The first step is to make sure you are buying a boat you are going to use. Sounds easy enough, but surprisingly, individuals often purchase sailboats that don't align with the type of boating activity they will realistically do. Consequently, these individuals end up purchasing a sailboat that does not meet their long-term needs and costs them much more then they anticipated.

No two lakes are the same. Think through questions such as, do you plan to use your sailboat for casual family day sails or in the deeper, rougher waters of a larger lake? Who will be using the boat with you? Will you need a crew… a kitchen… multiple bunks? How often and in what seasons will you be boating? Where will you keep the boat?

All of these considerations bring with them their own unique financial implications. And if you don't think through them honestly, you could spend more on your sailboat than is necessary, or your new boat could sit unused or in need of repair in its slip at the marina.

What Will Fit Into Your Budget?

An expert at the marina will help you find a boat that fits your lifestyle. A financial advisor can help you find the boat that fits your budget, as well as find the best financing strategy.

Calculating a monthly cost into your personal operating budget should be done in consideration of your complete financial picture. Only then you can calculate a budget with confidence.

It's important to consider your assets and investments, your liabilities and debts, your current and future income, and even your retirement plans. A sailboat can be a complex purchase that includes more than just the purchase price. Fortunately, as your purchase becomes more expensive and more complex, there are additional financing options open to you to get you closer to owning the sailboat of your dreams. Some of these include leasing, timeshare and fractional ownership, in addition to arrangements - such as setting up adequate operational accounts - that can help cover recurring or unexpected expenses that will come with the boat.

What is your Best Lending Option?

Even if you have the cash on hand, there may be better, more creative ways to finance this big-ticket purchase in a way that may allow your cash to work for you in higher-return investments. Credit may well be the way to go.

When it comes to lending options, there are many outside a traditional boat loan or personal loan to consider. For instance, a securities-based loan can increase your buying power without requiring you to liquidate your assets. Your financial assets - including eligible stocks, bonds, mutual funds, treasuries or CDs - when pledged as collateral to secure a loan can offer significant advantages. With a securities-based loan, you may qualify for a larger loan and lower interest rate. You can also defer potential capital gains taxes that would have resulted from selling the assets, and may benefit from future market opportunities by remaining invested.

You should know, however, that borrowing against securities and using stocks as collateral involves a high degree of risk. If the market declines, you may have to meet a "maintenance call" by depositing additional cash or collateral. If you are unable to do so, the lender can sell your securities without notice and with potentially adverse tax consequences. When considering a securities-based loan, you should take into account your individual requirements, portfolio composition and risk tolerance, as well as capital gains taxes, portfolio performance expectations and investment time horizon.

Another alternative financing option is to leverage the equity in your home. You can tap a potentially tax-efficient source of funds to help with the purchase of your sailboat and the interest you pay may even be tax deductible. (Consult your tax advisor for more information.) Innovations in home-equity loans are opening up new possibilities for financing, using home equity to establish a flexible line of credit. Many home-equity lines offer loans up to 90% of a home's value, interest-only payments, and require no minimum balance or draw. Leveraging the equity in your home requires an appraisal of your home and a loan closing. Of course, the length and type of loan will significantly affect borrowing rates and making minimum monthly payments on an interest only loan will not reduce the principle amount owed.

The Sailboat and your Overall Financial Picture

Before you take the plunge and purchase the sailboat of your dreams, be sure to take ample time to go over your financial portfolio to determine the best financing options for your personal situation. There are many different and non-traditional types of financing that are perfect for your situation, but that you might not have considered. A financial advisor can help you analyze your portfolio and determine the kind of sailboat that fits into your budget and overall financial picture. Doing so will save you time and money in the long run so you can comfortably sail off into the sunset in the sailboat of your dreams...

Barry Knight is a Private Wealth Advisor in Merrill Lynch's Wayzata, MN office. He can be reached at 952-476-5612 or barry_knight@ml.com.