My wife and I went on vacation to Disney World a couple of years ago. The family had a great time and I personally was glad to get away from business. We stayed at my parents Orange Lake Resort timeshare, which is just outside Disney World.
In the over 10 years they have owned it, this was the first time I went there. I never agreed with them on their purchase and always thought it was a bad decision. After all, they paid $10,000 for it, and today the maintenance is $750 per year. The resort itself is very nice, has all of the amenities, and is in a great location.
Still, my question is wouldn’t it be cheaper to just stay at a hotel or to rent a unit in the resort for that week? The answer, unfortunately, yes.
How Timeshares Work
A timeshare gives you a partial ownership in a vacation property. You can even think of it as owning shares of stock in the vacation rental. You pay an upfront price to purchase your unit and then annual an maintenance fee. This gives you access to the property for a certain period of time, which is usually the same time slot each year. When you are not using the timeshare, others with a similar interest are.
If you want to go at another time you must “bank it” and exchange it for another time or location. In the sales pitch (I had the misfortune of attending one) they mentioned they are no longer doing week-based timeshares. It’s now a points based system. You get X number of points per year when you buy a unit and can then use it any way you choose.
The points could be used instead for many other things: to purchase airfare, go to another location or upgrade to a bigger unit. Heck, like airline miles and credit card points, you can use them in stores like Best Buy or Bed Bath and Beyond. Great, I can buy that toilet seat cover, instead of going on vacation. I’m sure that, just like credit card points, you are getting a fair exchange of points into dollars.
If you don’t detect it, I’m being sarcastic.
I didn’t run the numbers, but I’m sure the conversion rates are awful. So in the end, they are making timeshares much more abstract to own than a hard asset, even a single week of it. High pressure sales guy please remind me again what’s the purpose of owning a timeshare?
The Missing Investment Component
It’s been said in poker that if you can’t spot the patsy, it’s you. This applies to purchasing a timeshare. The ones benefiting from the transaction are the sales person and the owners of the resort. You, unfortunately, are stuck with a small slice of a unit that has little or no resale value.
Here are the issues with owning a timeshare:
- There is a HUGE reseller market. Often you can pick up units for less than half of what was originally paid.
- Like buying a car, it depreciates once you “drive the timeshare off the lot” (take ownership).
- It’s rare that a timeshare increases in value. In fact, don’t expect it to.
- Timeshares are usually sold to you when you’re on vacation, and your defenses are down.
- Most have high yearly maintenance fees. In my parents case, it’s increasing every year, faster than the rate of inflation. For the amount that you pay in maintenance fees alone (forget about the initial “investment”), you can stay at a nice hotel for a few days.
Timeshares Don’t Generate Income
In theory, when you buy a timeshare, you have a fractional interest in the property the rental is situated on. But it’s important to understand that this does not give you all the advantages that owning real estate normally has.
For starters, you have an interest in the same unit as other people who participate in the timeshare. Your interest therefore is not a stand-alone ownership. You are not free to do with the unit as you please.
For example, there are strict limits on the time in which you have physical occupancy of the unit. Unlike a true vacation home, you’re not able to rent it out during the rest of the year when you’re not occupying it for personal use.
We can think of a timeshare as having a partial ownership interest in a single vacation property or unit. It’s nothing like owning a vacation property outright, and the benefit’s that come as a result of having it.
I think the timeshare market targets the financially inexperienced and lower income brackets. They’re vacation properties for people who can’t afford vacation properties. The sales materials are made to appear more about the bling and leading the good life, rather than about the investment return. That’s because there IS no return.
If you are spending money for the future, it should be considered an investment. If it’s not generating income, it’s an expense — plain and simple. You MAY get enjoyment out of it, but it’s still not an investment.
Timeshares Aren’t Very Liquid
It’s usually only after you’ve purchased a timeshare that you realize there are more people looking to sell them than buy them. The likelihood of recovering your initial investment is very low — to say nothing of recovering many years worth of maintenance fees.
If you’re able to sell the timeshare (and that is never certain) you probably will get only a fraction of what you paid for it. There are two fundamental problems when it comes selling them:
- More are being built/offered all the time, flooding the market, and
- Existing owners are selling them to get out of debt or once they realize that it isn’t the deal they thought it was when they bought in.
If you still think buying a timeshare is a good idea — and you want to avoid paying more than you will ever sell it for — buy one on the secondary market.There are many websites where you can buy a used timeshare.
The Better Alternative to a Timeshare
You are better off staying at a local hotel then buying into a timeshare. Using my parents timeshare as an example; they paid $10,000 for the initial purchase and if you add the $750 per year maintenance fee paid over a ten-year timeframe to the price, there is a total investment of $17,500 in the timeshare.
If you were to rent a decent quality hotel room at about $150 per night, the total price paid for the timeshare would buy you about 116 nights of hotel stays. Not only that, but you would be able to add variety to your vacation by staying at different resorts.
You would also be able to take advantage of buyer rewards programs and other discount pricing being offered by the hotels. Chances are you’d get a whole lot more than 116 nights of hotel stays.
Best of all, you’d have sunk no capital in the timeshare, and the money to pay for the timeshare could be invested to earn still more money. That’s a much better deal from where I sit.
What do you think about timeshares?