DVC purchase calculator?

[bnoble]

I think the minimum to make DVC work is at least one trip every two years for a variety of reasons. If you are thinking less frequently than that I think renting (from an owner or booking directly from Disney w/prevailing discounts) is a better bet. Certainly lower risk.

 

[wayne]

Every 3 years for 20 years is 6 trips for about $30,000 (assuming you’re buying direct) — seems like opportunity cost might be significantly greater than the locked in “value” of $5k/trip.

Yes but how would 6 trips of $5K be any different than 20 trips of $1500 in the analysis? That's what I'm trying to determine.

 

[DopeyRunr]

Yes but how would 6 trips of $5K be any different than 20 trips of $1500 in the analysis? That's what I'm trying to determine.

If you *knew* you were going every year consistently, BUT one time, you couldn't go, the opportunity cost is minimal. If your plans had to change, you could bank those points and maybe take two trips next year, or one longer trip, or reserve a larger room...

If you *knew* you were going every three years, BUT one time a global pandemic hit (or that was the year mom got cancer, or grandson's graduation conflicted), your $30K was tied up for potentially 4-6 years without you getting a single benefit out of it. Your plan is predicated upon maximum banking and borrowing, so that doesn't really provide any opportunity to get value from those points later.

DVC is a prepaid lodging plan for a vacation destination, with additional annual dues. If you're not going every year or two, as @bnoble points out, you're probably better off paying cash or renting points.

 

[wayne]

Thanks @DopeyRunr @bnoble this is useful feedback. With only one real vacation per year (at most - we're American after all), we typically rotate years between US City - National Park - European City - lesser road trip - Disneyland or something like that. Even if we doubled our Disney time, I can see what you mean. Prepaying for DVC "costs" more the longer you withhold from using the benefit.

I guess the conundrum for us is that as we consider being able to afford going to WDW every year, the opportunity cost of actually going to WDW every year might be never seeing Iceland or Maui or Kyoto or Venice or New Zealand or even Montreal or Boston. And that's way too high a cost.

Sounds like cash or rented points is the way to go in my case!

 

[bnoble]

Prepaying for DVC "costs" more the longer you withhold from using the benefit.

Exactly! Frequent regular value extraction beats infrequent future value extraction.

With only one real vacation per year (at most - we're American after all)

Maybe changing this is your answer. And perhaps paradoxically, it the thing I have found most beneficial to owning timeshares.

If I really think about it, I don't think owning timeshares has really "saved" me any money. I'm quite sure I've spent more money on vacations than I would have had I not owned them. But, that's because we are taking more vacations. When you've prepaid for annual vacations, you make taking them a priority, not something you fit in around other things.

Yes, that means we have not maximized our billable hours and our careers. But we bought our first timeshare when my kids were 6 and 8. They are now 20 and 22. The eldest is entering that period of her life when she is establishing her own independent existence, and not going to spend as much time with us---including not coming on as many vacations. And, while I grumble about never getting a Chaired Professorship, I wouldn't trade anything for the vacations we've taken with our kids over the years, because it is clear that I would not be able to replicate that now, no matter how much I spent on it.

 

[wayne]

When you've prepaid for annual vacations, you make taking them a priority, not something you fit in around other things.

Well there's a value statement that my spreadsheet doesn't have a cell for, but I'm completely on board with the concept...

 

[Bozni]

Hmm. That's surprising to me. Let's take a quick look. Again, I'm using 5% annual cost of capital. Are you using a higher CoC # and/or financing the purchase?

BLT direct purchase price is $170. The time horizon is 45 years, amortizing that at 5% gives you $9.48/pt/year. Dues this year are $5.05, for a total cost of $14.53/pt for the first year. I typically travel in Magic Season for DVC (though with some Premiere thrown in), and some mix of Peak and Regular Seasons for the rental calendar.

A week in a 2BR Lake View during Magic Season costs 386 points. At $14.53/year, that’s a total cost of stay of $5,608.58. The rack rate of that room in Regular Season is $1,215 per night, including tax, or $8,505 for a week-long stay. You’d need a discount of 35% to break even renting from Disney—not unheard of for a DVC stay, but BLT is often excluded from discounting. That’s not a bad discount, but it is still about $800 a night.

The Premiere/Peak comparison is a bit less favorable. A week in a 2BR in Premiere is 518 points, or a total cost of stay of $7,526.54. The rack rate of that room in Peak Season is $1,527, or $10,689. The DVC cost represents a 30% discount, more or less, off of rack.

So, a direct purchase isn’t a bad deal. But a resale purchase would be even better. Right now, the resale market for BLT looks to be about $100 give or take. Amortizing that at 5% the per-year purchase cost is $5.64. Adding dues you get $10.69. So a Magic week costs only $4,126.34, and a Premiere week is $5,537.42. Those are discounts off of rack of just over 50% and just under 50% respectively.

Also interestingly, the rental market for BLT is pretty robust. BLT points used to book in the home resort window are about $13-$14pp, so closer to the developer price than to the resale price.



You do better renting than buying direct from Disney, almost certainly. But, a resale purchase is usually at least a little bit better than renting (in the OKW case) and sometimes quite a bit better (in the BLT case). But, the analysis is cost-per-point, so it is independent of how often you go. The only real requirement for owning is that you really have to go at least once every three years, otherwise you lose points due to expiration. Once every other year is probably a safer bet, so that you don't have to hit the required points right on the nose.

Sorry to resurrect a 6 year old topic, but I came across your analysis while building a spreadsheet for my own personal DVC buying decision, and I was intrigued by your approach. I'm an accounting novice, so I was wondering if you could explain the "cost of capital"/amortization piece as it relates to a DVC investment.

My initial approach was to calculate a $/pt/yr cost by dividing the cost of the contract by the total number of points remaining on the life of the contract + the dues/pt:

But, I now realize that doesn't account for the time value of money. Is that what adding the "cost of capital" does or am I way off? Is 5% conservative? Thanks!

 

[DopeyRunr]

you can probably find pretty comprehensive explanations for those concepts elsewhere online, but I'd point out that you don't have any factor for "years remaining" in your equation, and you appear to be counting only a single year of dues per point rather than multiplying that times the length of the contract and including a factor for inflation (5-7% recently).

 

[Bozni]

you can probably find pretty comprehensive explanations for those concepts elsewhere online, but I'd point out that you don't have any factor for "years remaining" in your equation, and you appear to be counting only a single year of dues per point rather than multiplying that times the length of the contract and including a factor for inflation (5-7% recently).

By "Total Points Remaining" I mean the total points remaining on the life of the contract (number of years*pts per year), so I am taking number of years remaining into account.

Also, everything I read concerning amortization relates to paying off loans or spreading out costs, and everything I read about cost of capital relates to determining capital project worthiness or in investment to evaluate risk/return. I assume we're using it to determine the risk/return of a DVC investment, but since it seemed like @bnoble knew what he/she was talking about I thought I would ask for clarification/further explanation.

I did add a amortized $/pt. calculation to my spreadsheet, and for the most part it tracks along with non-amortized. However, in the case of the Poly there is a significant disparity between the two:



I assume this is due to the relatively high $/pt and moderately long length of contract.

 

[bnoble]

One quick-and-dirty way to figure out the amortization schedule: imagine you were borrowing the purchase price, paying it back as if it were a loan at <whatever>% for <years-until-expiration>. Any loan calculator will give you the numbers after that.

But, the larger point is this: if you are taking the purchase price and just dividing it by the years on the contract, you are someone that a timeshare salesperson would really like to talk to because they have a very "good" deal.

 

[Bozni]

One quick-and-dirty way to figure out the amortization schedule: imagine you were borrowing the purchase price, paying it back as if it were a loan at <whatever>% for <years-until-expiration>. Any loan calculator will give you the numbers.

Thanks, I figured out the math really quick, but it's more of the concept as it relates to a DVC investment that I'm trying to wrap my mind around. Does running the amortization numbers attempt to give you a realistic idea of what inflation will do to your investment over a long period of time, or is it attempting to calculate the opportunity cost of not investing the money?

 

[bnoble]

I do it to compare two alternatives:

1: Buying a DVC contract (a purchase price plus annual maintenance fees) and using it for some sequence of stays
2: Renting exactly the same stays as #1 on a pay-as-you-go basis.

For #2, imagine you take the purchase price and invest it in say an index fund. Then at the beginning of each year you add to that account what you would have spent on maintenance fees. Then, you pay market rate to rent your stay (from Disney, another DVC owner, etc.) deducting that amount from that account.

There are two possible futures: either the balance in #2 eventually goes negative, or it never does. If it never goes negative, buying will never save you money over renting, and you should dismiss it out of hand. (For example, I don't think a direct purchase of BCV makes any sense at all for anyone at this point.)

If it does go negative, the question is: How long does that take? How confident are you that your life circumstances won't change during that time in a way that materially impacts your desire/ability to vacation at WDW? If you are confident, then the purchase might make sense.

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Ultimately, the value proposition of a timeshare is that you commit to regular vacations in a particular resort/resort system for many years, and in exchange you get a discount on your lodging. The developer likes that because they get to amortize the cost of customer acquisition across the entire lifetime of an ownership. The customer likes that because they save money vs. renting as they go---assuming they go often enough and long enough to make it pay off.

 

[bnoble]

I will note that this take pessimistically assumes a contract will be (close to) worthless when you are done with it. That hasn't generally been true, but I suspect that most people won't have actually "made" money in inflation-adjusted terms when they sell, so it is reasonably safe to just ignore it. At worst you will be pleasantly surprised when/if you sell off.

 

[DopeyRunr]

By "Total Points Remaining" I mean the total points remaining on the life of the contract (number of years*pts per year), so I am taking number of years remaining into account.

Not really because there's a big difference in terms of time value of money between a 2000 point contract with one year left and a 50 point contract with 40 years left. Additionally, those dues of $7.05/point will be $47/point in 40 years after 5% compounded inflation.

 

[Bozni]

I do it to compare two alternatives:

1: Buying a DVC contract (a purchase price plus annual maintenance fees) and using it for some sequence of stays
2: Renting exactly the same stays as #1 on a pay-as-you-go basis.

For #2, imagine you take the purchase price and invest it in say an index fund. Then at the beginning of each year you add to that account what you would have spent on maintenance fees. Then, you pay market rate to rent your stay (from Disney, another DVC owner, etc.) deducting that amount from that account.

There are two possible futures: either the balance in #2 eventually goes negative, or it never does. If it never goes negative, buying will never save you money over renting, and you should dismiss it out of hand. (For example, I don't think a direct purchase of BCV makes any sense at all for anyone at this point.)

If it does go negative, the question is: How long does that take? How confident are you that your life circumstances won't change during that time in a way that materially impacts your desire/ability to vacation at WDW? If you are confident, then the purchase might make sense.

-----------

Ultimately, the value proposition of a timeshare is that you commit to regular vacations in a particular resort/resort system for many years, and in exchange you get a discount on your lodging. The developer likes that because they get to amortize the cost of customer acquisition across the entire lifetime of an ownership. The customer likes that because they save money vs. renting as they go---assuming they go often enough and long enough to make it pay off.

Thanks a lot for the explanation! That really clears things up and seems like the best way to think about the investment.

 

[Bozni]

Not really because there's a big difference in terms of time value of money between a 2000 point contract with one year left and a 50 point contract with 40 years left. Additionally, those dues of $7.05/point will be $47/point in 40 years after 5% compounded inflation.

Sorry, I thought you were just saying I ignored number of years entirely. I do realize that compound interest and inflation are things that exist, but I wasn't sure on the best way to account for them in order to make a decision on this investment. Thanks for your input!

 

[Strangeite]

It had been a while since I had calculated the numbers for our contract so I was curious. We bought a 100 point contract in 2013 at $60 a point. The total cost since then has been $10,681 (not including closing costs but I don't want dig through the filing cabinet to locate them). If I had invested the original $6000 in a fund averaging 7.5% with a 0.25% fee, and added the average of $573 a year in maintenance dues, the balance of the account would be $16,863.

In other words, buying DVC has cost us $6182. To break-even we would need to be able to sell our contract for $61.82 a point. Not bad.

Of course that doesn't factor in the cost of tickets, transportation, meals, merchandise, etc, which if we are being honest add up to the cost of many vacations on their own.

 

[DopeyRunr]

In other words, buying DVC has cost us $6182.

To get a true sense of cost, shouldn't you discount your adjusted expenses by the value received for the points you used (maying using a Moderate rack rate as proxy)? That would reduce your break-even significantly.

 

[bnoble]

Of course that doesn't factor in the cost of tickets, transportation, meals, merchandise, etc, which if we are being honest add up to the cost of many vacations on their own.

Ayup. I've said it before, but I am quite sure that owning timeshares has not saved me money over just leaving myself to my own devices and paying as I went.

Why? Because prepaying for vacations has led to taking more of them.

Rather than fitting vacations in when I have time, taking them has become a higher priority. We bought our first timeshare when the kids were early in grade school. The youngest turned 20 this past October. I have a lot of things I regret about my active parenting days, but I am happy that we took at least a few weeks each year to get away with and focus on each other.

 

[Strangeite]

To get a true sense of cost, shouldn't you discount your adjusted expenses by the value received for the points you used (maying using a Moderate rack rate as proxy)? That would reduce your break-even significantly.

I phrased it poorly, I should have said lodging at Disney has cost us $6182 using DVC. To figure out the value received for that $6182, I would need to figure out how many nights we have stayed at Disney since 2013 and the rack rate for each date we were there. That is way more effort than I need to expend, particularly when I am procrastinating on my real work.