DVC buy-in and amortization (a math snooze-fest)

[agie65]

With all due respect, you've been on here a month. Are you sure you have the perspective necessary to determine that a conversation is overdue?

The face of the matter is that these types of analyses have come and gone, and every few months there is someone new to the DVC forums that comes on and thinks they have the next best analysis. In my opinion, it unnecessarily complicates matters.

If the conversation happened few months back what is wrong to have it again, yes for me overdue since I did not come across this conversation. Some time down the road same thing will repeat again. You are not respecting any one with these comments. If you already had these conversations then sure point into that particular thread and everybody can get insight of the topic.

 

[Dean]

That's a shame, if its the case. Unless people can save money over doing the same thing without DVC, I see very little point in buying into DVC. I'm sure this happens when people buy in based purely on emotion, but its a shame if they could have done the same thing for less money by just buying or renting as they go. Just because you don't do exactly what you assumed in your initial projections 30+ years out doesn't mean you don't save money. When you change your habits/preferences, you can still account for this difference from your initial assumptions, and they can still be money-saving activities. And besides, by the time you get 10+ years out, most people could have already saved enough from previous trips/renting points that the rest is gravy. If you aren't going to use it in a way that saves you money any more, then the sensible thing to do is to sell the points back. Not saying everyone does this (because I have no way to know, nor does anyone else), but it would be the rational and pretty easy thing to do.

It depends. To me the very definition of saving money is comparing to what you would have spent on cash without owning DVC. I look at any additional quality, size, etc as added value but NOT savings. I agree that most don't do what they planned going in and thus many do not save money on DVC compared to taking the same trips without DVC. Add to that likely more trips and you're definitely spending more. In general terms if you compare to a moderate 1 room to a studio, you'll be pretty much even, well ahead compared to a deluxe. Mostly the same answer for a 2 BR compared to 2 hotel rooms. It's difficult to impossible to show a savings with a 1BR or 3BR if you account for all factors but there may be enough added value to make it worthwhile. It does in part depend on your assumptions. My assumptions would be paying cash and accounting for the time value of money invested with an 8% after tax return (yes doable long term) reducing the amount by the amount one would spend on the room only for vacations. Using DVC rack rate as the comparison is the height of irrationality.

And that's just using DVC for DVC resorts. If one reduces the value by using DVC for cash type options like DCL, it becomes very difficult to show a dollar or value benefit. When I use the word value, I'm still looking at objective type issues, not warm and fuzzy feelings.

 

[bighoo93]

It depends. To me the very definition of saving money is comparing to what you would have spent on cash without owning DVC. I look at any additional quality, size, etc as added value but NOT savings. .

That's reasonable. You can either pay less for similar accommodations or pay a similar amount for better. "Getting more for your money" is a generalized term that covers both more precisely. I don't draw an important distinction between that and "saving money", so that's probably why it seems odd to me that many are so insistent that you don't save money with DVC. And of course, my situation may be particularly well suited to saving money, because our alternative plan was to rent points to stay in DVC 2 BR.

 

[chateau]

dmunsil- nice thread, thanks. I act more intuitively based on knowledge I've accumulated, rather than doing the math. A post like this helps build the foundation on which I base decisions..... overdue! (I "think" I'm qualified to say this! )

All kidding aside, I wouldn't have taken the time to crunch the numbers... when someone feels compelled to perform such a task, I'm grateful!

 

[BestDadEver]

Using DVC rack rate as the comparison is the height of irrationality.

I dont get this . Comparing to rack rates is the only apples to apples comparison IMO . Everything else is just hypothetical . I guess you can mix in a 30% discount in there but whats the likelihood that you get a 30% discount every time you go for 50 years .

What if one has no previous history visiting disney . Is it acceptable then .

 

[BestDadEver]

This is hoisted from another thread where we're deliberately trying to ruin a new DVC member's fun by doing financial analysis of DVC. So hopefully all the math nerds can come over here and we can get all numerical and stuff.

Anyway, it's bothered me for a while that lots of people calculate the "all in" cost of DVC by adding the dues cost to the buy-in divided by the number of years. That's not right. Money now is worth more than money later. If I am buying something that will get me a discount 40 years from now, I will not pay the same amount of money as if I'm getting a discount today.

(There's a related error where people calculate their "payoff point" in years by adding up all their discounts to see in what year they end up "paying off" their buy in. That's also not right - it takes more years than the simple analysis would suggest, because the money you are going to save in the future is worth less than the money you paid in the present.)

One way to spread a buy-in cost over a number of years is an amortization. This is the same calculation used to figure the payment on a mortgage of a certain amount, which makes sense, because in essence you're the bank - you give Disney a chunk of money, and they promise to "pay it back" by giving you discounts on rooms in future years. The cost to you for those discounted rooms in the future is the amortized cost.

In other words, of the discounts Disney is giving you, the amortized cost is just the payback of the money you paid in. That's the amount of money you could have gotten just putting the money in a mutual fund and slowly drawing money out until it was down to 0 somewhere in the future.

So for, say, Boardwalk, there are 29 years remaining. If I had to pay $72 per point, how much per point per year, assuming that I could have put $72 into a mutual fund earning 4.5% instead? The answer is $4.49, which is much higher than the simple $72/29, or $2.48. So my all-in cost is $4.49 every year, plus the dues cost, though to be a useful analysis I need to account for the rise on costs of dues over time.

However, that's not as useful a way of looking at it. For one thing, there's inflation. Amortization calculates a fixed payment in nominal dollars every period, because that's the way most people think about money. Calculating everything in "real" (i.e. inflation-adjusted) dollars is hard to work out. But not doing do makes things difficult to project far into the future. Near the end of the Boardwalk contract's life, my dues might have risen to $11, but the amortized buy-in (using my previous calculation) is still $4.49. Since the cost of everything else in the world has gone up, my cost per year has gone down in real dollars.

One way to get around this is to do inflation-adjusted amortization. A simple way of doing that is to pick what appears to be a reasonable inflation amount and subtract it from my implied interest rate that I could get for my money. So if I think I can get 4.5% from a mutual fund, but inflation is going to be 2%, then I calculate the amortization as 4.5% - 2% = 2.5%. Then I'm getting a "real dollar" amortization. Now my cost for my $72 per point contract is $3.52 per year in constant 2013 dollars. In fact that number in nominal dollars will go up by 2% every year, but it's the same value in real inflation-adjusted dollars.

Doing inflation adjustment on the buy-in means I need to do inflation adjustment on my dues increase as well. It means that a 3.5% dues increase per year is a 1.5% dues increase in real dollars. Again, accounting for all of this can make your head hurt. The key is to either do everything in real dollars or in nominal dollars and stick to it.

Ultimately whether you do a real dollar amortization or a nominal dollar amortization is a bit of a complicated decision, and it depends on the analysis you're trying to do. But either one is clearly a better way to go than just dividing the buy-in cost by the number of years. Doing that kind of simple division understates the cost of buying DVC, which to some extent is something that Disney exploits to make the purchase appear more attractive than it really is.

As it turns out, if you use your points to stay in DVC properties, the discounts are so large that it always pays off no matter what. If you do a slapdash analysis or a rigorous analysis, it's still a bargain. If you use your points to stay in rooms with the least payoff in cash value (which would be 1 bedrooms, for what it's worth), you still come out ahead. It just takes longer to come out ahead for certain rooms and times of year than for other rooms and times of year.

On the other hand, if you use your points for cruises and staying in Disney (non-DVC) hotels, doing the financial analysis correctly shows that you're losing money with every stay. The amortized cost of the buy-in plus the dues is less than the cash value of the room or cruise.

Anyway, I want to be clear: no matter how you run the numbers, it's a good deal buying into DVC if you use it mostly to stay in DVC properties. It's such a good deal, in fact, that it's still saves most people money if they finance their purchase at 11% interest. That's accounting for the time value of money and everything. I still keep squinting at the numbers trying to figure out where I've gone wrong. It feels bizarre to me that Disney would make such a one-sided deal in some sense. Obviously Disney has plenty of financial analysts, so I trust that they're pretty happy with the payoff matrix. But it still feels strange. I've always been suspicious of a free lunch, and DVC seems too good to be true.

Now ELMC will tell me I should never use the phrase "free lunch" when talking about DVC.

You do realize there is no guarantee you make money in a mutual fund and you can loose money that is not FDIC insured . Your not taking into account the fact that the 4.5% you talk about is going to fluctuate . There is also no mention of the ever increasing price per point , the fact you pay an extra 12% tax if you pay OOP .

I think there is no real way you can calculate for inflation its not a constant .
This kind of thinking makes me wonder if you can ever buy anything without over analyzing it to death . Seriously even people I know that are stingy with money even let loose on vacation , you said in your statement that no matter what you save money with DVC that really should be it . Why does it have to be how much you save down to a penny . IMO disney is not the place to be if your looking for savings . Really its just money , you can always make more .

 

[BestDadEver]

With all due respect, why are you jumping on new members like that? Just because the join date is new, doesn't mean they may or may not have been lurking the forums for years and have some insight as to the regular discussions occurring.

Yes, there's always the latest and greatest analysis/spreadsheet/numerology thread going on to justify someone's past or future DVC purchase. Nothing wrong with it - numbers change over time (just look at resale values the past 6 months), and people have a new situation that may or may not fit the current thread. While a lot are similar, someone's slightly new insight or twist may be just the thing someone else was looking for to justify (or remove) their want for DVC. Some don't need a spreadsheet and slide rule - they'll do a basic look at costs of DVC vs what they've currently been spending at Disney and decide it is worth it (or not). Others want to look at it a little more carefully and use some spreadsheets to get some more detail, since it is a long-term purchase commitment. And others just love math and are closet accounting geeks.

Anyway, sorry for the post if it offended anyone, hate to see newbies anywhere being jumped on for no real reason; and congrats on finally giving me an excuse to de-lurk after three years.

It's quite possible that they have been on here for years, but I only know what I see based on the join date. I don't think I jumped on anyone. Someone who has been on this forum for two months made a comment about something being a long time coming. I addressed it. It's fair game, and nobody jumped on anybody until you decided to finally contribute and defend someone who doesn't need defending. While your motives are noble, your actions are a bit unnecessary. If you post something in these forums, you should expect that your statements could be challenged. Not attacked, not jumped on, but challenged. That's the key to productive discourse. Sorry if it ruffled your feathers.

I agree with ELMC . This member has been giving out one sided advice lately with little experience , and IMO with lots of holes in there statements .

 

[Sur]

There was some show that I saw one time, and it was about Richard Branson owning his own private island, where with one of the bathrooms, the toilet had an incredible view. I mean, come on now, who really needs a toilet with a view, but when you are Richard Branson, that happiness while you are doing your business gave him value.

The show was MTV cribs! Sadly, that home was struck by lightning and was a complete loss. Kate Winslet had been staying at the home, the night of the fire, and aided Sir Richard's elderly mum to safety. They have since rebuilt.

You do realize there is no guarantee you make money in a mutual fund and you can loose money that is not FDIC insured . Your not taking into account the fact that the 4.5% you talk about is going to fluctuate . There is also no mention of the ever increasing price per point , the fact you pay an extra 12% tax if you pay OOP . I think there is no real way you can calculate for inflation its not a constant .
This kind of thinking makes me wonder if you can ever buy anything without over analyzing it to death . Seriously even people I know that are stingy with money even let loose on vacation , you said in your statement that no matter what you save money with DVC that really should be it . Why does it have to be how much you save down to a penny . IMO disney is not the place to be if your looking for savings . Really its just money , you can always make more .

I agree with ELMC . This member has been giving out one sided advice lately with little experience , and IMO with lots of holes in there statements .

Don't you just HATE it when spell check fails and you misspell "their" with "there" or "You're" with "Your"! Makes us look so dumb!

 

[BestDadEver]

Throwing this out there and someone with direct experience in the "paying upfront" hotel/timeshare/vacation business can probably chime in.

But perhaps people who buy into these things up front, don't actually go every year, or just 'waste' them. I know a few people who's parents own timeshares, whether by fixed week or points and many of them just let it go to waste each year. Since they feel that they already paid it, they don't need to go, if they can't that year. I'm not sure what the percentage is, but if it's high enough, it may be worth the risk?

Its been mentioned many times that the DVC members on DIS represent only a tiny portion of DVC owners. I've research a few of the owners of the resales that I bought and their buying trends. A few I can see did not use their resort in the last couple years and had loaded contracts, then the year they sold, they bought the newest advertised DVC, prompting them to sell their older one DVC.

Talk about not learning from your mistakes. I can't see how someone could justify doing that. I guess some people just can't rationalize their spending. Either that or a few grand doesn't phase them...although they weren't using their points anyway and lost on their resale.

Its not a mistake . Thats not what he was saying . The person that sold to buy the new DVC property , already had though he had got his moneys worth from the old contract .

 

[BestDadEver]

The show was MTV cribs! Sadly, that home was struck by lightning and was a complete loss. Kate Winslet had been staying at the home, the night of the fire, and aided Sir Richard's elderly mum to safety. They have since rebuilt.



Don't you just HATE it when spell check fails and you misspell "their" with "there" or "You're" with "Your"! Makes us look so dumb!

I really don't care

 

[ELMC]

If the conversation happened few months back what is wrong to have it again, yes for me overdue since I did not come across this conversation. Some time down the road same thing will repeat again. You are not respecting any one with these comments. If you already had these conversations then sure point into that particular thread and everybody can get insight of the topic.

I'm sorry you found my comments to be disrespectful, as that was not the intent. I simply had a problem with your word choice and I pointed it out. Perhaps it would have been more appropriate if you had said that this conversation was necessary, or important, or meaningful. But to say it is long overdue suggests that we have not been engaging in similar conversations or ignoring this particular perspective. I was a bit taken aback by that implication and so I responded. Maybe I misinterpreted your original comment.

 

[ImagineerTHAT]

Its not a mistake . Thats not what he was saying . The person that sold to buy the new DVC property , already had though he had got his moneys worth from the old contract .

I agree with you...it could have been a contract that was "paid off" so they let the points load and they sold it to get a better property.

It doesn't say that anywhere in the post, so you are making an assumption...but you are correct that could be the case.

That being said, I took it to mean that someone wasn't using their points and made another impulse buy. Both are possible.

 

[dmunsil]

You do realize there is no guarantee you make money in a mutual fund and you can loose money that is not FDIC insured . Your not taking into account the fact that the 4.5% you talk about is going to fluctuate .

Yes, I'm quite aware of that, and yes, I did take it into account. I think it's far more likely that the dues will go up faster than 3.5% than it is that I can't make 4.5% in simple bond funds over the long term. I might not make 4.5% in a single year; depending on the fund I could actually go negative for short periods of time. But overall the long term trend is actually higher than 4.5% - I chose 4.5% to be conservative.

If you choose a lower number, DVC looks even better.

There is also no mention of the ever increasing price per point , the fact you pay an extra 12% tax if you pay OOP .

Well, yes there is, for the first one. This post doesn't actually compare to room rates, but my NPV post did in fact account for the 12.5% room tax. Feel free to read both of them again.

This kind of thinking makes me wonder if you can ever buy anything without over analyzing it to death .

Wait, you have to wonder that?

But seriously, I already bought some time ago. I'm just having fun now. If you don't find this fun, no one is making you read the thread.

IMO disney is not the place to be if your looking for savings . Really its just money , you can always make more .

Again, if you're not convinced you'll get value out of DVC, why did you buy? Warm fuzzy feelings? Because you love Disney so much you want to give them more of your money for nothing?

Even if you're already convinced DVC is a good deal, these kinds of analyses can tell you several things:

- Under what circumstances does it cease to be a good deal? For example, what uses of points should I avoid? What are the "danger signs" that would cause me to rethink membership?

- Are there specific times of year or specific rooms or resorts that are better to book on cash? Are there times when financially I'm better off renting points and booking other rooms with the proceeds?

I for one am interested in these things, and if you're not, no one will think any less of you. I'm the obsessed and/or crazy one, remember?

 

[bighoo93]

I dont get this . Comparing to rack rates is the only apples to apples comparison IMO . Everything else is just hypothetical . I guess you can mix in a 30% discount in there but whats the likelihood that you get a 30% discount every time you go for 50 years .

There's an old joke about a guy who loses his keys in a huge parking lot on a dark night. He's searching near the base of a lamp post, but he can't find them. Another man approaches to see if he can help. "Is this where you think you dropped your keys?," the man asks. "Nope. But this is the only place where I can see."

Somehow I think that applies a little here. Its easy to use the rack rate, because it is a set, published number that we have access to, including perhaps historical numbers. But the problem is, nobody will actually pay that. So while the number is easily accessible, it is actually a nearly useless metric for comparison, and worse, it is one that will put a tremendously unrealistic bias in an analysis, leading you to believe that you will save a lot more than you ever would in reality (which in turn implies you should be willing to pay a much higher price than you really should).

Sure, you aren't going to get it precisely right by using some set discount off the rack rate. That's a common misguided criticism of these kinds of analyses. You don't have to perfectly predict the future in order for it to be valuable. You just need to be able to make a reasonable range of projections, and recognize the sensitivity of your output to errors in those assumptions. We're talking about projections many years in the future: it's all hypothetical.

 

[bighoo93]

This kind of thinking makes me wonder if you can ever buy anything without over analyzing it to death . Seriously even people I know that are stingy with money even let loose on vacation , you said in your statement that no matter what you save money with DVC that really should be it . Why does it have to be how much you save down to a penny . IMO disney is not the place to be if your looking for savings . Really its just money , you can always make more .

It really goes without saying that you (and all of us) can do whatever you want. if you don't care whether you could take the same vacation for less money (or take longer/more/better vacations for the same cost), then don't worry about it. I certainly don't think everyone has to do this kind of thought process for any purchase, even a major one like a timeshare. To me, this is just kind of the way I think, so it comes easy. I couldn't imagine not thinking it through logically. But for others, it is a big, annoying hassle that detracts from the whole experience, and frankly its worth it to them to maybe end up paying a little more so that they don't have to be bothered with this stuff.

 

[agie65]

I'm sorry you found my comments to be disrespectful, as that was not the intent. I simply had a problem with your word choice and I pointed it out. Perhaps it would have been more appropriate if you had said that this conversation was necessary, or important, or meaningful. But to say it is long overdue suggests that we have not been engaging in similar conversations or ignoring this particular perspective. I was a bit taken aback by that implication and so I responded. Maybe I misinterpreted your original comment.

Apology accepted, and at the same time I did not had a correct word as you mentioned. I just want to see how everybody takes it, a true cost of ownership of DVC.

 

[ELMC]

Somehow I think that applies a little here. Its easy to use the rack rate, because it is a set, published number that we have access to, including perhaps historical numbers. But the problem is, nobody will actually pay that. So while the number is easily accessible, it is actually a nearly useless metric for comparison, and worse, it is one that will put a tremendously unrealistic bias in an analysis, leading you to believe that you will save a lot more than you ever would in reality (which in turn implies you should be willing to pay a much higher price than you really should).

I agree with almost everything you say here, especially the part about flawed assumptions that lead to paying more than one probably should. The part I disagree with is how nobody pays rack rates. While I would not do it, there are people who do. BestDadEver has said many times that he does. That also probably explains his direct SSR purchase at a time when resales were readily available in the $50pp range. With his analysis using rack rates, the numbers made sense.

 

[bighoo93]

The part I disagree with is how nobody pays rack rates. While I would not do it, there are people who do. BestDadEver has said many times that he does.

OK. I don't think I've ever even been offered rack rate for a room. Anywhere, ever. It isn't because I go bargain-hunting all the time, its just that rack rates are outrageous. Anyway, if that is truly someone's alternative, then using that as the baseline is fine. I wouldn't do it personally, and I wouldn't recommend anyone do it unless they are certain that this really is what they would expect to be paying, because I don't think most people will ever do that.

 

[dmunsil]

Its easy to use the rack rate, because it is a set, published number that we have access to, including perhaps historical numbers. But the problem is, nobody will actually pay that.

Actually, Disney routinely gets the rack rate for their rooms, sometimes even when they're running discounts and specials, because if you just go to their page and ask for a rate, they offer you the rack rate.

Most hotel chains if you go to their own web site will offer a variety of discounts off the rack rate as a matter of course. Not Disney. It's kind of like the way they never really discount heavily their "masterpiece" movies on DVD, and every once in a while put them in a "vault" so you can't get them. Disney understands that price sends a message, and Disney's consistent message is "our stuff is better than everything else, and you should pay more for it."

So for a lot of the year, there ain't much in the way of discounts available for Disney's hotel rooms. They just don't play that game as much as the other hotel companies.

So when I did my NPV calculations in the other thread, I used 10% discount from rack as my comparison. It's not perfect, because if things go your way you can sometimes get 30% off rack with the right discount. But you can't count on getting it. Even during the periods when they're having discounts, if they sell enough rooms for some nights, they remove the discount for those nights.

 

[bighoo93]

Actually, Disney routinely gets the rack rate for their rooms, sometimes even when they're running discounts and specials, because if you just go to their page and ask for a rate, they offer you the rack rate..

That's just amazing to me. I always try to remember to look at the rack rate posted on the door in whatever hotel I stay in. Just for kicks, because the rate is always way, way, way above what I would think anyone would consider paying. This includes the times I've stayed at Disney hotels. If your alternative to DVC is paying rack rate, then DVC is going to provide phenomenal savings.