Am I Making a Foolish Purchase?

[havoc315]

Hello all! New member and first post. I know there is a good chance this has probably been asked before in the past. I'm sorry for the repost if so.

My question: Is it worthwhile to make a DVC purchase if you plan on only using it, on average, once every 5 years? This assumes you rent out the entirety of your points during the years you don't use it.

From my perspective, it makes sense still. For example, if you purchase 225 points for Riviera you pay an upfront cost of $42,913.36 as of today. This contract has a life of 49 years. Historically the maintenance fees and the value for each point have appreciated more or less at the same rate (technically the points themselves appreciate slightly more then the maintenance fee but the difference is small). So, if you assume you rent each point for $16 year-over-year, and pay a $8.50 maintenance fee, that provides a return of $1,687 annually. That means you would "pay off" the value through rentals alone in 26 years (25.44 rounded up). So you essentially lock in 23 years of free hotel stays (length of stay for each year obviously depending on your room). This is still worth it for someone looking to provide the occasional free hotel stays for his family once every few years, right?

Even from an investment standpoint a $1,687 annual return is still a 4% return YoY on investment. Not a great return, but not bad. And yes, I know you should not treat a timeshare like an investment, but it doesn't change the fact that this statement is true.

Obviously there are additional risks which include:

-Disney folding
-Being unable to rent for a year (i.e. coronavirus) -- but then you just double up the next year
-Family coming to hate Disney

But I view these risks as being pretty low/negligible. Definitely not any more risky (likely less) then simply just throwing $43,000 into stocks.

Anyway, what do you all think? Curious to hear from existing owners on what they think about my logic.

Thanks!

No.

First off, you note "being unable to rent for a year" dismissively. It's not about Covid. It's simply not always going to be easy to always rent out all of your points. If you go through a 3rd party service, you will get under the $16 per point you cite.
But your point rental needs to match the needs of the person renting. So unless you were to find a renter that needs exactly 225 points, you won't be able to rent them all. You may find you're only able to rent out 180-210 of those points per year, on average. You won't easily find anyone who needs to rent just the remaining 15 points.

So don't count on that $1,687 return per year. And with so much unknown about the future, with the addition of more and more DVC inventory, it's quite possible that it becomes more difficult to rent out points in the future.

Second, any investment where it takes you 26 years to "break even" is not a good investment. As I said, it would likely take longer since you can't expect to maximize your rental value. If you took that initial investment of $46,000 per year and stuck it into a S&P tracking mutual fund -- Then in 26 years, it likely would grow enough to give you far more than 23 years of vacations. Assuming a return of 5-9%, that $46,000 would grow to between $163,000 to $432,000. What would you rather have, $432,000 or 23 years of 1-week hotel rooms?

DVC is a disposable income purchase. It's something to buy and use and enjoy. If you are actively using it and enjoying it, then it's worth losing the opportunity to grow your money in other ways. If you are rarely using it and enjoying it, then there are much better things to do with your money.

 

[Brian Noble]

but there are people that do buy contracts with the sole purpose of renting out the points -- or even stripping them and then flipping them.

This is worth commenting on in light of my observation above: the former (making DVC a rental business) is pretty hard to justify given my understanding of the economics.

The latter---flip loaded contracts by stripping them---might be different. From where I sit, the market under-values loaded contracts and over-values stripped ones. So, there may be an opportunity there. I've never looked into it carefully enough to have an opinion about whether it's a "good idea" vs. other things I could do with my time or money, but I wouldn't dismiss it out of hand. The one thing that would give me pause is the friction in sales commission on the outgoing side might eat up most if not all of the spread, so it's also not obviously a good idea.

 

[mustinjourney]

This is worth commenting on in light of my observation above: the former (making DVC a rental business) is pretty hard to justify given my understanding of the economics.

The latter---flip loaded contracts by stripping them---might be different. From where I sit, the market under-values loaded contracts and over-values stripped ones. So, there may be an opportunity there. I've never looked into it carefully enough to have an opinion about whether it's a "good idea" vs. other things I could do with my time or money, but I wouldn't dismiss it out of hand. The one thing that would give me pause is the friction in sales commission on the outgoing side might eat up most if not all of the spread, so it's also not obviously a good idea.

if you go to the ROFR thread -- you will sometimes see the same few people buying up tons of contracts. Just in this past quarter, someone has already passed ROFR on over $160,000 in points and another $180,000 or so pending ROFR...plus another $150,000 that were taken by disney. The contracts have different UYs and different home resorts...which makes me believe the person is going to be renting or stripping.

Either that -- or they just really love DVC and want to own all of the resorts. And won the lottery.

 

[Stargazer65]

I only recommend DVC for people who want it strictly to vacation at Disney on a regular basis. That is at least every three years. As some have already stated, if you want to do it less frequently, rent points to do so.

 

[Brian Noble]

The contracts have different UYs and different home resorts...which makes me believe the person is going to be renting or stripping.

If any aren't loaded (or worse, stripped) it's not just flipping.

 

[Deb & Bill]

Just pay cash for a trip every five years.

 

[crisi]

Disney's hotel room occupancy were pretty lousy pre-pandemic - its one of the reasons they converted Poly, VAKL and VGF rooms to DVC. They continue to build DVC units. It feels to me like they are starting to push the risk of low occupancy onto DVC owners who believe they "will always be able to rent their points." I mean, its an incredible win for Disney, they get capital in their hands TODAY, they don't have nearly the overhead since rooms are cleaned less often, you are responsible for the guest, so less liability, and when DVC rooms start sitting empty because DVC rental supply exceeds demand, Disney will have pocketed both the initial purchase price and the dues that are figured off that room being occupied and what that means for transportation/staffing/ maintenance, etc. Plus their management fee.

So my answer is no.

(And do not forget that you need to pay taxes on rental income. You can probably write off dues. You generally cannot write off the initial purchase price.)

 

[Karl66]

Personally I wouldn't put $43,000 into something i was only going to use every 5 years. Additionally, you'll need to use at least 2 UY's worth of points to get a decent room at Riviera, so you'll be using them yourself and not renting them. This will add years to your payoff strategy.

 

[maytagatjc]

If your heart is set on RV, may consider buying a third of the original points (75) and bank/borrow for a trip every 3 years (75x3).

 

[CaptainAmerica]

Yes, that would be extraordinarily foolish.

 

[Heather07438]

Potential pitfalls.

#1 Will you resist the urge not to use a year of points more than twice a decade? A major pull from owning DVC is it stays on top of your thoughts.

There’s a learning curve to renting out your points. Watch the rental boards for a few weeks. Much time renting is spent educating prospects on the finer details of DVC, so patience is a virtue here. Some owners make it look easy breezy and others end up investing a lot of time and effort to get it done.

 

[anomamatt]

I would never do this.

I’m skeptical of any plan that is dependent on renting. Covid aside, there are plenty of times the big rental brokers are offering $10-14 / point rentals. The market just isn’t there for expecting to always get $16 a point. Unless you have Grand Cal points…

And I’m sure someone has an analysis of MF increases versus rental price increases. I don’t think it’s been favorable for owners renting points.

 

[Carol_]

Better investment choices:
VOO
VGSLX
SCHD