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This article is by staff writer William Cowie.
Summer is winding down and so you’re sitting on the patio catching up with your friends. Mark and Sally just came back from their timeshare vacation on Maui, and they’re breathless as they recount all the fun things they did.
That night, you and your significant other wind down before blowing out the candle, and naturally the topic of timeshares comes up. Mark and Sally looked so happy, not to mention their tans. So the next day you ask around and one of the things you hear someone say is timeshares are good investments. Being as curious as the next person, you wonder, is that so?
In a word, no.
Investments come in two forms: those that pay out a return in cash (like interest or dividends), and those that just appreciate. Timeshares don’t pay any cash while you own them, so all that’s left is appreciation.
Do timeshares appreciate?
What causes appreciation?
To answer that, you need to look at what makes things appreciate. In no particular order, they are:
Income growth If you own a rental property and the rent you receive continues to escalate, the value of that property as an investment will appreciate, because it’s able to generate a greater return over time.
Internal addition Berkshire Hathaway is famous for not declaring any dividends. They are profitable, and they grow by keeping those profits and reinvesting them. In other words, they keep making more money. This causes internal addition, and the value of an investment in BRK stock appreciates as a result.
Replacement cost If the cost to replace an asset increases, that will cause the value of the asset to appreciate. For instance, if zoning restrictions become more onerous, the cost to build a new apartment block will go up and that, in turn, will cause the value of existing apartment blocks to appreciate.
Scarcity Anything in demand but in limited supply will appreciate. Gold is probably the classic example. There’s a finite amount of gold in the world, and its supply is growing slower than the growth in accumulated wealth (demand) worldwide. That causes its value to appreciate over time. Same with beachfront property in a popular area.
When you assess scarcity, the key variable is demand. If more people want something (like Bitcoin when the IMF swooped down on Cyprus) its value will rise. When the item falls out of favor, that scarcity premium vanishes too.
Expectation What people think/believe will happen in the future affects appreciation greatly. Nowhere is this more evident than in the stock market, where the P/E multiple expresses investors’ general anticipation of future growth. When they expect solid growth, the P/E rises, causing the stock to appreciate. This is also true in things like empty land. When people think property just beyond the city limits will be incorporated and developed, their expectation alone will cause the value of that property to appreciate.
Summary In general, the floor value of an investment is usually determined by the cost to create it, and its ceiling is determined mainly by scarcity and expectations.
So is a timeshare a good investment?
No, because almost all the factors listed above work against timeshares.
Income growth Owning a timeshare yields the benefit that a week spent in a timeshare unit will cost less than a week spent in the same place renting a condo on the open market. The bigger that gap, the bigger the intrinsic value of a timeshare.
In recent years, though, timeshare developers realized that once someone bought a timeshare from them, they’re a captive market. So they simply raise the fees associated with use. As a consequence, the weekly cost to actually use your timeshare has been growing much faster than the cost of just renting a condo on the open market. In fact, some resorts charge you more to stay there than you’d pay elsewhere.
So that value of timeshares has dropped dramatically.
Replacement cost The floor of replacement cost on a timeshare is astoundingly low. An average two-bedroom condo will cost a developer, say, $150,000 to build. Split over 50 weeks (for nice rounded numbers), that means the replacement cost per week on that condo will be $3,000.
However, experience has shown developers that consumers are really not that into numbers and almost none of them do the (relatively simple) math. It was, and still is, possible to extract an average of $10,000 to $20,000 for a single week in resorts like that.
That enormous margin allows timeshare developers to spend $3,000 per week per condo in sales and marketing costs. That translates to $600,000 for a typical 200-unit resort. That’s an enormous amount, which explains the incredible selling programs, from elaborate sales centers to airfares and giveaways. And it’s also no surprise that timeshare developers have high-pressure sales tactics that make used-car salespeople look like Sunday school choir singers.
Those margins also mean there are more developers and developments than there is demand. In turn, that means the replacement-cost floor will become a bigger and bigger factor in setting the value of a timeshare in the long run.
Scarcity There is none. In fact, if you look on the open market for resale timeshares, you can get some for next to nothing, because there’s a glut of owners who want to get out from the increasing fees.
Expectation As more and more people realize that new buyers are being ripped off and resale values have dropped, resale buyers are unwilling to pay decent money, even for good weeks at good resorts. The expectation of dropping values is depressing timeshare values even further.
If the idea of a timeshare appeals to you, there’s nothing intrinsically wrong with that. But there are three things you need to consider seriously:
- Only buy a resale. You’ll save a minimum of 50 percent.
- Negotiate: You have all the leverage, so take advantage of it.
- Check the fees, and compare them to open-market condo rentals. Also, be sure to check to see what power the developer has to raise those fees in the future.
You may find a good resort and a good plan to swap out your week for other places, and have a great time timesharing. But try not to be tempted to think of a timeshare as a good investment.
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