Determining the True Cost of DVC

[DVC Dude]

Determining the True Cost of DVC

There are tons of debates on the pros and cons of DVC and people tend to use their own interpretation of what the DVC purchase cost them or saves them, so I wanted to start a thread as an attempt to come up with a way to determine the cost of a DVC purchase (new or resale). We may not all agree, but this thread should be math based as that allows a true determination of value. If you want to add your own factors, then I would be interested in hearing about that.

What I find is that most people forget about the opportunity costs of the purchase and the fact that this is a RTU asset and will eventually be worth $0 so there is a depreciation cost as well. Interest payments on a loan are significant, but a loan will replace the opportunity cost factor as the down payment is usually minimal with loans.

When comparing the DVC savings versus booking a room at Disney, most people use the rack rate, but as we all know there are many ways to get discounts that are far cheaper than rack rates. Also the bonuses like free dining represent huge additional discounts. So, unless you can show proof of those exact discounts, the best way to determine the cash rate equivalent is by visiting the Disney website and getting a quote for a hotel plus taxes and fees. And yes, those taxes can really add up.

When comparing DVC ownership vs renting, there are generally three common rates online. Distressed points usually rent for $10 and below, non-distressed points rent for $11-12, and brokers charge $13-14. I know some spec renters charge $15 and more, but those are not very common. So I am proposing a general average of $11pp and this can be adjusted up or down a few dollars as you see fit.

Factors that determine value of a DVC contract are:

Annual dues – this can vary from $4.78 to $7.75 depending on location. They tend to rise about 3% per year on average

Depreciation cost – this will take into account the purchase price divided by the number of years left on the contract. OKW will expire in 2042 and BLT will expire in 2060 so they will have different values. I believe that the best way to determine this is a straight line depreciation as they all will be worth $0 at the end, but there will be variability during the lifetime of the RTU that may have the contract with positive or negative equity, but that is a wildcard and difficult to calculate.

Interest or lost opportunity costs – if you buy a contract for $10,000 cash, then that is a significant outlay of money that should have some lost or opportunity costs as that money could be used elsewhere like sticks, bonds, CDs, etc. On the other hand, if you only placed $1,000 down and financed the purchase with 14% interest, then that is a huge factor that will affect value. Although most people will not finance over the entire RTU of the contract, the total money spent should probably be spread out over the entire lifetime of the DVC.

In My Humble Opinion, the SIMPLEST way to evaluate a DVC purchase is:

$ annual dues + $ depreciation costs + $interest (on loan) or lost opportunity


An example for a 100 point SSR resale (41 years left) contract @ $70 could be:
$4.91 annual dues + $1.70 depreciation + $3.50 lost opportunity (based on 5%) = $10.11 per point

An example for a 100 point OKW resale (29 years left) contract @ $60 could be:
$5.54 annual dues + $2.07 depreciation + $3.00 lost opportunity (based on 5%) = $10.61 per point

An example for a 100 point VB resale (29 years left) contract @ $40 could be:
$7.75 annual dues + $1.38 depreciation + $2.00 lost opportunity (based on 5%) = $11.13 per point

If you bought a 100 point VGF (50 years left) contract @ $150 could be:
$5.41 + $3 depreciation + $7.50 (assumes a 5% rate) = $15.91 per point

Resale value of the DVC contracts are a real wild card as many people will not keep their contracts the full lifetime, and I am surprised at how long people keep their contracts.

Also, when comparing OKW to VGF, the fact is that VGF has 21 MORE years of useful life left and I am not sure of how to best compare them equally.

 

[Deb & Bill]

Determining the True Cost of DVC

...When comparing the DVC savings versus booking a room at Disney, most people use the rack rate, but as we all know there are many ways to get discounts that are far cheaper than rack rates. Also the bonuses like free dining represent huge additional discounts. So, unless you can show proof of those exact discounts, the best way to determine the cash rate equivalent is by visiting the Disney website and getting a quote for a hotel plus taxes and fees. And yes, those taxes can really add up.....

You really need to look at what you have paid in the past, what you have booked in the past. If you always booked a DVC one bedroom for cash, use that. If you booked a value room, use that.

And I'm with Dean on the idea that most members will not own their DVC until the resort lease expires. Use a more realistic length of ownership.

 

[DougEMG]

You really need to look at what you have paid in the past, what you have booked in the past. If you always booked a DVC one bedroom for cash, use that. If you booked a value room, use that.

And I'm with Dean on the idea that most members will not own their DVC until the resort lease expires. Use a more realistic length of ownership.

If you assume that most members sell after X number of years, then you also have to make an assumption on how much the contract will be worth at that point. The depreciation being used is just as good a number as anything else in that I think the OP is just trying to come up with an estimate of what each point is costing you this year so that you can then compare those costs against other options.

 

[crisi]

I think that each individuals valuation is going to be subjective depending on the needs of the valuation - therefore, there isn't a simple way to do it because you need to understand what you are doing in terms of the accounting, why you are doing the accounting in the first place, what you would have done instead of buying DVC (both in terms of what you would have done with that money and how you would have vacationed) -

Actually there is a simple way to do the accounting - do you like it + can you afford it = you are good. Everything else is either numbers games (which are fun) or justifications for people for whom the affordability is questionable (which is dangerous).

 

[dmunsil]

In My Humble Opinion, the SIMPLEST way to evaluate a DVC purchase is:

$ annual dues + $ depreciation costs + $interest (on loan) or lost opportunity


An example for a 100 point SSR resale (41 years left) contract @ $70 could be:
$4.91 annual dues + $1.70 depreciation + $3.50 lost opportunity (based on 5%) = $10.11 per point

I think this is a great overall framework, but it's unclear why you're using straight-line depreciation plus a separate interest calculation, rather than wrapping it all up in an annuity. After all, that's the question: if I'm going to buy something for $7,000 that's going to last exactly 41 years, how much could I get if I just bought an annuity at 5% instead?

The answer to that question for $70, 5%, and 41 years is $4.05/pt. In other words, you could invest $7,000 at 5% for 41 years, and draw out $405 each year, at which point the principal is completely depleted. So it's a reasonable approximation of the opportunity cost, all in. It's both the depreciation and the interest combined.

Then you hit the second problem: hotel rates and dues will keep going up in price, but a straight line depreciation or a simple annuity calculation doesn't change over the years.

I did this same set of calculations earlier this year, and after wrestling with both of those factors, I thought the best way to try to calculate a per-point price for today was to imagine a rising annuity, where the value taken out each year goes up by the same projected amount as the dues. That way, the rise in dues tracks the rise in withdrawals from my (imaginary) investment.

If you use 3% as the dues inflation rate, then calculate an annuity where the payment rises by that amount over a fixed time period. $7,000 at 5% for 41 years, with a 3% increase in withdrawal every year, produces $2.52 the first year. By the last year, it yields $8.21 and is used up. Dues have also gone up, presumably, by the same amount. Instead of being $4.91, they're up to $16.02. But because the dues and annuity went up at the same rate, and also tracked (presumably) the rise in rack rates and rental rates, the various costs have all maintained the same proportional relationship to each other.

So the best comparison, IMO, would be $4.91 + $2.52 = $7.43 for current year costs.

So bottom line, I think you may be overstating the present-day cost somewhat by using straight-line depreciation plus interest and by not accounting for inflation.

 

[DVC Dude]

Some people will NOT put a value on the opportunity costs of the purchase as they paid cash and will say things like - I had the money or the interest rate was 1%, etc.

But you have to look historically that the average ROI on cash is 4-5% over the long term or at least the Inflation rate can play a factor and I am of the school of thought that you NEED to put a realistic value on this purchase (investment, cough-cough) as the numbers are large like buying a car.

To satisfy those cash buying individuals, they could use this way to evaluate a DVC purchase:

$ annual dues + $ depreciation costs

An example for a 100 point SSR resale (41 years left) contract @ $70 could be:
$4.91 annual dues + $1.70 depreciation = $6.61 per point

An example for a 100 point OKW resale (29 years left) contract @ $60 could be:
$5.54 annual dues + $2.07 depreciation = $7.61 per point

An example for a 100 point VB resale (29 years left) contract @ $40 could be:
$7.75 annual dues + $1.38 depreciation = $9.13 per point

If you bought a 100 point VGF (50 years left) contract @ $150 could be:
$5.41 + $3 depreciation = $8.41 per point

You really need to look at what you have paid in the past, what you have booked in the past. If you always booked a DVC one bedroom for cash, use that. If you booked a value room, use that.

And I'm with Dean on the idea that most members will not own their DVC until the resort lease expires. Use a more realistic length of ownership.

I understand what you are saying, but that will not change the scenario above and you can use the true cost of your DVC to compare a studio or a 3 bedroom unit and it should not matter.

I used to believe that people would only keep DVC membership for 12-15 years or so, but the limited data we have is WAY higher and there is still something like over 80% of original OKW owners out there.

DVC membership is long term and unlike any other timeshare I have ever seen.

I think that each individuals valuation is going to be subjective depending on the needs of the valuation - therefore, there isn't a simple way to do it because you need to understand what you are doing in terms of the accounting, why you are doing the accounting in the first place, what you would have done instead of buying DVC (both in terms of what you would have done with that money and how you would have vacationed) -

Actually there is a simple way to do the accounting - do you like it + can you afford it = you are good. Everything else is either numbers games (which are fun) or justifications for people for whom the affordability is questionable (which is dangerous).

I mean you no disrespect, but this is NOT a mathematical example and is exactly why I am trying to compute a true cost of ownership (i.e I am playing a numbers game).

What you want and what you can afford are sorta irrelevant to me as I want to find a scientific method to compare one DVC contract to another at a different resort to a rental from a broker to a cash reservation from Disney, etc.

We need OBJECTIVE data (i.e. not subjective like do you just like it). Once we have found the objective price, then you can compare two different options and if you subjectively think VGF is worth 3x SSR, the at least you know what premium you will pay for that.

These days, most people do not go car shopping randomly into a car showroom of whatever car they want (top of the line Mercedes) and pay whatever price they are offered as most shop online for a good deal (i.e. Toyota camry). Why is DVC shopping any different?

 

[DVC Dude]

If you use 3% as the dues inflation rate, then calculate an annuity where the payment rises by that amount over a fixed time period. $7,000 at 5% for 41 years, with a 3% increase in withdrawal every year, produces $2.52 the first year. By the last year, it yields $8.21 and is used up. Dues have also gone up, presumably, by the same amount. Instead of being $4.91, they're up to $16.02. But because the dues and annuity went up at the same rate, and also tracked (presumably) the rise in rack rates and rental rates, the various costs have all maintained the same proportional relationship to each other.

So the best comparison, IMO, would be $4.91 + $2.52 = $7.43 for current year costs.

I actually like your model of calculations BETTER than the ones I included above.

Thanks.

How do you compute the $2.52 rate?

 

[dmunsil]

I actually like your model of calculations BETTER than the ones I included above.

Thanks.

How do you compute the $2.52 rate?

An annuity is just a mortgage where you are the payee rather than the payor, so it uses the same math. As I'm sure you know, to calculate a fixed mortgage payment in Excel, you use PMT. For $70, 5%, 41 years, that's PMT(5%, 70, 41). That tells you what equal amount you can take out for all 41 years. You can also calculate it directly, but it's a long-ish equation.

To do a rising annuity where it goes up every year, you calculate the first year with an implied interest equal to (nominal_rate - inflation_rate). So if your nominal interest is 5% and your inflation is 3%, you use (5% - 3%) = 2% for the first year payment, or PMT(2%, 70, 41). That gets you $2.52. Then for the next year, you calculate the payment as (prev_year * (1 + inflation)). So $2.52 * (1.0 + 0.03) = $2.59. Continue for 41 years.

It's not obvious that the above works, but if you cross check it, it ends up being super close to correct. The annuity runs out exactly on schedule (plus or minus a few cents, which might be just rounding issues). It's essentially the calculation economists use when they say the "real interest rate" on a bond is the nominal rate minus expected inflation. You are getting a "real rate" on your investment of 2% over inflation.

 

[dmunsil]

I take back what I said about it being super close to correct to use the subtracted interest rates. I was going from memory from my spreadsheet I built earlier this year, but I didn't look at the cross-check column. It's off by a few cents on the initial payment calculation, but the cross-check reveals that at the end of 41 years the error compounds and you're off by a few dollars. I think for a first pass, rough and ready calculation it's fine.

Via trial and error I worked out the initial number that works correctly with 3% inflation, and it's approximately $2.57 instead of the $2.52 you get with the method I posted previously. I'm willing to live with that kind of error, though I'd like to work out the correct calculation.

If you want to play with the spreadsheet, I shared a version of it via skydrive here:

http://sdrv.ms/1bKPjJR

 

[dmunsil]

OK, I figured out the real calculation for the first payment of an inflation-adjusted annuity, which for what it's worth is:

pmt1 = -PMT((1+interest)/(1+inflation)-1, nper, pv) * (1+inflation)

Simple, right?

 

[DVC Dude]

OK, I figured out the real calculation for the first payment of an inflation-adjusted annuity, which for what it's worth is:

pmt1 = -PMT((1+interest)/(1+inflation)-1, nper, pv) * (1+inflation)

Simple, right?

awesome...thanks...and thanks for the spreadsheet link.

I think your method is the best and most FAIR representation of the true cost of a DVC purchase

 

[DisneyDenis]

I take back what I said about it being super close to correct to use the subtracted interest rates. I was going from memory from my spreadsheet I built earlier this year, but I didn't look at the cross-check column. It's off by a few cents on the initial payment calculation, but the cross-check reveals that at the end of 41 years the error compounds and you're off by a few dollars. I think for a first pass, rough and ready calculation it's fine.

Via trial and error I worked out the initial number that works correctly with 3% inflation, and it's approximately $2.57 instead of the $2.52 you get with the method I posted previously. I'm willing to live with that kind of error, though I'd like to work out the correct calculation.

If you want to play with the spreadsheet, I shared a version of it via skydrive here:

http://sdrv.ms/1bKPjJR

Your Cross Check Annuity Balance is $$/point I assume. Why does it increase the first n years, then decrease as I would expect it always do?

By the By, you are amazing with numbers and statistics.

 

[Dean]

I must admit there are many personal variables. In general I think the best comparison for SAVINGS is what one has paid traditionally increased by a reasonable factor for inflation of 3-4%. IMO that is also the best method to compare for any added value that DVC provides for the upgrades, kitchen, etc.

In my view the cost is:

• Upfront costs geared to return principle over 10 years, not the RTU time remaining.
• Dues increased by an inflation factor (3-4%).
• Lost earnings divided into 2 groups (1% for the first 5 years worth and maybe 8-10% for all the rest).
• Any interest paid added to the costs if financed.
• A reduction of the initial lump sum yearly for the rooms costs for the resort type one has gotten before DVC, adjusted by the same inflection factor.

As a rule I think most are overly optimistic when they look at such costs and almost always they look at close to the best case scenario. I believe one needs to look at the best case scenario, worst case scenario and the best guess of what's likely to happen for their personal situation with a couple of bad issues included such as having to cancel at least twice losing all of the points for that trip. Common mistakes include ignoring the time value of money, using the DVC rack rates for comparison, not including at least 10-20% discount for the cash options, financing a luxury purchase, and being overly optimistic on what the kitchen will save that person, not to mention controlling personal risk in general.

 

[dmunsil]

Your Cross Check Annuity Balance is $$/point I assume. Why does it increase the first n years, then decrease as I would expect it always do?

By the By, you are amazing with numbers and statistics.

Thanks for the kind words. I like fiddling with numbers; what can I say?

The cross check is in essence simulating the balance in an annuity account. In other words, if you were able to get an account paying that much interest, and you withdrew the given amounts each year, that column would be the balance at the end of the year. You just want to see that the balance goes to exactly 0 in the last year, as a cross-check that the annualized purchase price column is correct.

It goes up for a while because you begin by taking out less than the interest, which allows you to take out more than the interest near the end of the time span.

I do agree with Dean and Crisi that while this is a very interesting numerical exercise and has value, it involves some predictions that are pretty simplistic. You can't actually find an account that will pay you a flat 5% for the next 41 years, though bond income has averaged close to that over long-ish periods. I like to use 4.5%, but even then it's a rough approximation just to help get a sense of the time value of money.

You can also calculate out the net present value of the stream of discounts you will be receiving for the next 41 (or whatever) years, and calculate what you should be willing to pay to get that stream of discounts. In this case the discounts are the difference between the projected dues and the projected cost of similar accommodations. If the net present value of all the discounts is higher than the purchase price, then the purchase is a good deal.

Ultimately it's just another way of looking at the same thing, and suffers from the same problems of trying to make sense of what it's worth to you today to get a discount 41 years in the future. Dean's suggestion of just looking at 10 years is more conservative than I personally like, but it's a good way of looking at it as a general framework. If the purchase looks good with a time frame of 10 or 15 years, then every year after that is gravy.

The way I prefer to evaluate a timeshare purchase is via calculating years to payoff of the purchase price. You just add up the discounts you receive each year, and see how many years until you are cash-positive. After that point, all future discounts are in your favor. Since in most cases the total payoff time is going to be 10 years or less, you can even get away without factoring in interest, inflation, time value of money, or depreciation, and at worst you might be off by a year or so. Compounding really starts to throw things off when you're talking about 41 years, but at 10 years you can essentially ignore lots of factors and still be in the ballpark.

The key is to be realistic about what you would really be paying for rooms. You can't compare directly to rack rates if you've always managed to get a discount in the past. You might want to calculate as though you always got free dining, or calculate based on an average discount of 20% off rack.

The great thing is that it's a pretty easy thing to work out. If you pay $70, and you work out that each point is "worth" $16 in rooms, and dues are $6, then you are clearing $10 per point per year, and your payoff is 7 years. So for 7 years, you will be in the hole, having paid more for your stays than you would have if you stuck to cash. But after that you're saving big bucks.

The downside of using the "years to payoff" strategy is that it doesn't help you distinguish between a resort that has 50 years to go and one that has 30 years to go.

Me, I do all three. But I like to fiddle with numbers.

 

[Dean]

To add a different approach. IMO the trust cost for an individual is based on the true cost of what one has done historically (and would likely do without DVC) plus any added costs of DVC in the first few years plus how DVC affects one's vacation and spending habits. People often go more owning DVC and they often spend more in other areas because they view DVC as costing less at the time of the trip. Whether any or all of those are good things depends on variables beyond the scope of what can be addressed on a BBS such as this.

 

[crisi]

To add a different approach. IMO the trust cost for an individual is based on the true cost of what one has done historically (and would likely do without DVC) plus any added costs of DVC in the first few years plus how DVC affects one's vacation and spending habits. People often go more owning DVC and they often spend more in other areas because they view DVC as costing less at the time of the trip. Whether any or all of those are good things depends on variables beyond the scope of what can be addressed on a BBS such as this.

That is what I'm getting at, Dean.

If what you are doing is speculating - buying DVC contracts in a down market, renting the points, and then flipping the contract for a profit - that's a whole different model than someone who is buying primarily to use at DVC. And that's a different model than someone who is buying to rent points out. And that is a different model than someone who is buying and plans to use their points to trade and cruise. And if you plan on doing a little of all the above, you'll need to take pieces of each model. Then, if your behavior isn't modeled within the model (you'd never take your sister and her kids if you were paying cash, but paying for their room so they can go with you on points sounds like a great idea) then the model is different yet again. A decision to buy against a decision to rent points is a different model than a decision to buy against a decision to buy a Bonnett Creek resale or a decision to stay in a value resort on cash or a decision to vacation somewhere other than WDW.

There isn't going to be a true cost, because each of these are going to bring different variables into the equation in terms of opportunity costs, you'll need to make different assumptions, etc. My own "true" model would have a much higher interest rate than 5% in it, because I don't have investments that return less than that over the long term.

And in the end, they are models. And models merely model reality - imperfectly.

 

[jade1]

What's the true cost of not having DVC?

 

[jade1]

My BIL bought BCV when it opened and sold in 2006 I believe, maybe 07 but quite a bit more than he paid, even most dues if I remember. So some examples can be quite good.

 

[Nabas]

Some people will NOT put a value on the opportunity costs of the purchase as they paid cash and will say things like - I had the money or the interest rate was 1%, etc.

But you have to look historically that the average ROI on cash is 4-5% over the long term or at least the Inflation rate can play a factor and I am of the school of thought that you NEED to put a realistic value on this purchase (investment, cough-cough) as the numbers are large like buying a car.

But shouldn't everyone factor in not what they could do with the money but what they would do with the money if they didn't buy a DVC?

If the money is going to sit in the bank because that's what that potential buyer would do, then that's what they should use as a ROI. If it's going to sit in a mattress, then they should take that into account.

Purchasing a DVC is a personal decision and each individual should take into account their unique lost investment opportunity.

 

[jockotaco]

To add a different approach. IMO the trust cost for an individual is based on the true cost of what one has done historically (and would likely do without DVC) plus any added costs of DVC in the first few years plus how DVC affects one's vacation and spending habits. People often go more owning DVC and they often spend more in other areas because they view DVC as costing less at the time of the trip. Whether any or all of those are good things depends on variables beyond the scope of what can be addressed on a BBS such as this.

As an add to this the other issue is what do you compare it to. Your room type prior to DVC or a DVC comparable. I have a family of 5 and prior to DVC we crammed into an offsite resort room utilizing 2 queens and a rollaway. When we stay at a DVC resort on points we typically rent a 2 BR It's a much different and better experience but numbers would be hard to run or try and figure out what the comparable would be.