I think my new motto should be: “When all else fails, build a spreadsheet.”
Over the last couple of weeks I’ve been (intermittently) thinking about time shares and whether or not there is good value in purchasing one. I haven’t reached a definitive conclusion, but I am beginning to make a bit of progress. First, some background…
We live in Utah and have two young kids. So far, most of our family loves sunshine, beaches, and Disney. If there’s somewhere we’re likely to go, year after year, California and Hawaii are as good a bet as any. These factors make the Disney Vacation Club a good place to begin studying out the pros and cons of a time-share ownership.
There is also an interesting feature of all Disney time shares that I like: after 50 years, ownership reverts back to Disney. It’s more like a lease than ownership. How, you might ask, does it make sense to buy into a property you never really own? Well, there are actually a couple of good reasons…
If Wikipedia is to be believed, time-sharing got its start in the United States in 1974, making the oldest time-share properties about 40 years old. Have you ever stayed in a 40-year old time-share? Would you want to? Many timeshare owners find that as their property becomes older and outdated, they can’t get rid of them at any price. There simply is no good exit strategy, which leaves owners potentially on the hook for ever-increasing maintenance fees for a property they no longer visit.
Disney solves this problem by reserving the right to take in back. I expect that when properties reach the end of their 50-year life cycle, Disney will either completely renovate or bulldoze the properties and replace them with more profitable attractions. Try doing that with thousands of fractional owners of a building. Not only does it allow someone to take action on an aging property, it allows Disney to control and make the best use of real estate surrounding its park. I’d call it a win-win.
The real question, though, is “Does is make sense to buy into a Disney time-share?” Unfortunately, the answer is: Maybe. This is where the spreadsheet comes into play.
There are enough variables in this equation that anyone considering a purchase in a time-share should plug his/her own assumptions into the model. I have included all of the tabs referenced in the following analysis so you can do your own math.
It might help to go through an example or two:
Owning the Villas at Grand Californian
The first step of this process is to identify the number of points needed for the kind of stay you want. For my purposes, I figured 150 points at the Grand Californian would be about right. It would give me a full week in a Deluxe Studio during some of the less crowded times of the year at Disneyland. (This could also be broken up into a couple of weekend trips.) At current market rates, these points can be purchased on the resale market for about $105/point with about $750 in closing fees. Assuming a 5% increase in Maintenance Fees over the life of the ownership period and a 10% discount rate (what I would expect to earn over the long run by putting my money in a diversified stock fund), I calculated the present value of the payments for this ownership stake to be $26,088. But is this a good deal? Let’s see…
The alternative to ownership would be to spend 7 nights in a hotel. Rates at the Grand Californian can easily be $400/night. However, I don’t think I would spend more than about $200/night. This doesn’t factor in the benefits that come from DVC ownership (such as discounted park passes and meals. Using the same assumptions of 5% inflation in hotel expenses and a 10% discount rate, I calculated the present value of payments for hotel stays to be $22,596; significantly less expensive than the ownership proposition. Feel free to tweak the assumptions based on what you think is reasonable.
The bottom line here is that it is cheaper to rent than to own. The advantage to renting, of course, is that you also aren’t locked into a long-term agreement obligating you to take a vacation to the same place every year. For us, and with the right assumptions, this could make sense for the first ten or twenty years. However, it would be difficult to predict the value of these points on a resale basis twenty years into the future. Also, the graphic above only shows ten years of results, but the model is designed to show returns if the time-share is held to expiration: 2060 for this property.
Next, let’s move to an example that seems to make more sense…
Moving beyond California, I thought I would take a look at Aulani, in Hawaii. The analysis is the same, but the variables are different. In this case, it only takes 126 points to visit in February, which is right about the time we’re looking for a good warm weather fix. Points can be purchased for closer to $95 each. The maintenance fees are different (and I have used subsidized fees in this example; this is an issue you would want to be familiar with before making a purchase). Expiration of the time-share agreement is 2062 for this property.
Aulani is a pretty remarkable property. I have conservatively estimated a $250/nigh hotel cost. However, paying for something comparable would actually be significantly above this amount. Even with this modest hotel room expense, the Present Value of ownership payments equal $21,373, which is significantly below the PV of Hotel Rental at $28,562.
The bottom line here is that ownership could make sense, from a strictly economic perspective. The problem is that you have to commit to going to Hawaii every year. I know that doesn’t sound like much of a hardship, but changing schedules, fluctuation airfare prices, and the other vicissitudes of life can make such a commitment challenging. The numbers look much better in this example, but buying real estate is not something to be taken lightly.
A DVC Time Share as an Investment?
In the course of researching time-shares, I quickly discovered that there are lots of people who own properties and never actually visit them. A few seem to make tidy profits by simply renting them out. Naturally I had to build a model to estimate the potential returns of such an endeavor. Since Aulani seems to offer attractive economics as a personal use property, I figured it might be a good rental, as well.
Out on the InterWeb, there is a guy name David who runs a seemingly respectable website where he buys and sells DVC points that might otherwise go unused. Currently, he buys at $11 and sells at $14. You can do better on your own, but he takes the hassle out of the transaction. By using some of the same assumptions as previous models (i.e. the inflation rate at which points can be sold each year will match the inflation rate of the maintenance fees), I calculated that buying points in Aulani and renting them every year could potentially yield an Internal Rate of Return of 10.85%.
I’m no investment advisor, and I’m not recommending any kind of investment decision. But when I think about the potential return and diversification of revenue that could be added from this option…I kind of like it.
Whenever you actually wanted to visit the property, the cost would simply be the opportunity cost of the rental income you would otherwise earn. As with the other models, I have assumed that the property reverts back to Disney at expiration.
There are numerous other variables that can influence the decision to purchase a time-share, but I finally feel like I understand how the numbers add up (or don’t). Let me know if you spot errors in the analysis.