DVC as an investment

[MJ6987]

Just wondering if anyone has done the calculations on this? If you bought a DVC contract and just rented out all the points every year to expiry, would you actually make any money? If so, what is the % yield each year?

 

[DLgal]

The terms of DVC ownership prohibit this. Disney does keep track of how often you do that and you can be held liable for violating the contract of ownership if you do it too often.

 

[MJ6987]

The terms of DVC ownership prohibit this. Disney does keep track of how often you do that and you can be held liable for violating the contract of ownership if you do it too often.

Really? But they do allow renting points occasionally officially? Or do they just "turn a blind eye" to it (apologies if that phrase doesn't translate from UK to US )

 

[disneynutz]

Really? But they do allow renting points occasionally officially? Or do they just "turn a blind eye" to it (apologies if that phrase doesn't translate from UK to US )

They prohibit "commercial" renting but I don't believe that they have officially defined "commercial".

Bill

 

[crisi]

You wouldn't make much and there are some risks.

Your rental point - if you rent the easy way though David's - would get you $11 - you could probably get $12 or $13 if you rent yourself (a lot more bother). David charges $14, so at that point you are competing with brokers who can offer services like escrow and owner aggregation. So - to be conservative, lets say $11.

Let's say you own SSR (sort of best case in terms of purchase price and dues, although the riskiest since not many people go looking for SSR points at eleven months - you end up with potential availability issues at seven. My BWV points are easy to rent at eleven months during Food and Wine - SSR doesn't have that sort of primary demand period). Let's say you are getting it for $75 a point purchase price - and to keep the math easy - 100 points (you can put a multiplier in there for whatever you want).

So you spend $7500 on the points. This year dues at SSR are $4.91 - lets round to $5. They'll be that or higher next year. And lets use an interest rate of 5% (the dividend rate for AT&T stock or close to the dividend rate of BP - in other words, conservative interest assumptions).

So in year one, each point has cost you $75 - or lets say $2 per year, plus $3.75 in TVM, plus $5 in dues, you rent for $11. you rent for $11. You have about $10.75 in costs, and make $.25 in profit. But wait, you aren't done, you have to pay taxes on the profit, but being a timeshare, your profit is rental amount - dues - so $11 - $5, or you pay taxes on $6 in profit. (At least in the U.S.). So you are looking at - say a 25% tax rate, paying $1.50 in taxes. So at this point, its cost you about $1.25 to own for the purpose of renting points.

Financial math simplified and I haven't had my coffee yet.

 

[CarolMN]

Renting is expressly permitted. However, the documents you sign at purchase include a clause that prohibits commercial use. Commercial use is not defined in the documents.

Based on the reports of others, making 20 or more reservations per year for someone other than yourself will trigger an "audit". You will be asked to show that you are not renting "commercially".

Before you proceed with this plan, be sure you understand all the risks and the time you may have to invest to be successful. You will experience competition for customers and DVC will hold you responsible for any damage or bills that your customers may leave behind.

Others will probably chime in with specific info on the financials. FWIW, any potential profit isn't enough for me to invest the capital, let alone compensate for my time. YMMV.

 

[MJ6987]

You wouldn't make much and there are some risks.

Your rental point - if you rent the easy way though David's - would get you $11 - you could probably get $12 or $13 if you rent yourself (a lot more bother). David charges $14, so at that point you are competing with brokers who can offer services like escrow and owner aggregation. So - to be conservative, lets say $11.

Let's say you own SSR (sort of best case in terms of purchase price and dues, although the riskiest since not many people go looking for SSR points at eleven months - you end up with potential availability issues at seven. My BWV points are easy to rent at eleven months during Food and Wine - SSR doesn't have that sort of primary demand period). Let's say you are getting it for $75 a point purchase price - and to keep the math easy - 100 points (you can put a multiplier in there for whatever you want).

So you spend $7500 on the points. This year dues at SSR are $4.91 - lets round to $5. They'll be that or higher next year. And lets use an interest rate of 5% (the dividend rate for AT&T stock or close to the dividend rate of BP - in other words, conservative interest assumptions).

So in year one, each point has cost you $75 - or lets say $2 per year, plus $3.75 in TVM, plus $5 in dues, you rent for $11. you rent for $11. You have about $10.75 in costs, and make $.25 in profit. But wait, you aren't done, you have to pay taxes on the profit, but being a timeshare, your profit is rental amount - dues - so $11 - $5, or you pay taxes on $6 in profit. (At least in the U.S.). So you are looking at - say a 25% tax rate, paying $1.50 in taxes. So at this point, its cost you about $1.25 to own for the purpose of renting points.

Financial math simplified and I haven't had my coffee yet.

Thanks - great quick calculations! So, basically, the rental market is priced to allow people to just about breakeven on their points in periods where (for whatever reason) they can't use them themselves. Makes sense I guess, given the prohibition on commercial use.

 

[MJ6987]

Renting is expressly permitted. However, the documents you sign at purchase include a clause that prohibits commercial use. Commercial use is not defined in the documents.

Based on the reports of others, making 20 or more reservations per year for someone other than yourself will trigger an "audit". You will be asked to show that you are not renting "commercially".

Before you proceed with this plan, be sure you understand all the risks and the time you may have to invest to be successful. You will experience competition for customers and DVC will hold you responsible for any damage or bills that your customers may leave behind.

Others will probably chime in with specific info on the financials. FWIW, any potential profit isn't enough for me to invest the capital, let alone compensate for my time. YMMV.

I wasn't planning on doing it, just wondered out of curiosity how it worked out - I wasn't aware of the regulations

 

[crisi]

Thanks - great quick calculations! So, basically, the rental market is priced to allow people to just about breakeven on their points in periods where (for whatever reason) they can't use them themselves. Makes sense I guess, given the prohibition on commercial use.

It isn't a direct relationship - but its more of an unintended consequence. Rental prices are controlled by what people are willing to spend (and they aren't willing to spend too much - they know that there is risk in DVC, they don't get the same cancellation policies, they don't get housekeeping, they have to plan in advance - they aren't going to pay rack rate - they want a bargain) and what people are willing to rent for - and most people who rent simply want to cover their dues plus a little the year they can't go - or pay for a cruise when a cruise on cash is a better deal.

Over the years, there has been a lot of noise that DVC rental rates MUST go up - and they have from $10 to more like $11-$14. But now the top is controlled by brokers - and individual renters aren't likely to get more for their points than brokers unless they have something special to offer (an eleven month window at GCV, eleven month booking for F&W at BCV or BWV, eleven month window for VGF) - and those specialty offering can only be marketed to renters in the know - many renters are still at the "hey, its June, lets see if I can rent points for Food and Wine at Boardwalk in a Standard View this year! It will be really cheap." stage of knowledge about the process.

 

[Dean]

Just wondering if anyone has done the calculations on this? If you bought a DVC contract and just rented out all the points every year to expiry, would you actually make any money? If so, what is the % yield each year?

Depending on your buy in price and assuming you only rented (didn't use) and picked higher demand times to offer, you'd make a profit but generally in the 6-8% range before taxes (usually less) is about the best I've seen on previous calculations. That assumes resale, good price, high demand reservations and the like. When you consider it's a drepeciating asset, ultimately it'd be difficult to make much at all and consider ROP as well. Given it'd be a high risk investment, it's not worth doing it as an investment alone UNLESS one can get in for much less in some way. Given Disney's ROFR, this is unlikely.

 

[HokieGCC]

Under nearly all conceivable conditions Disney would have constructed this (DVC) so only they make money ...or they make all the money to the maximum degree possible.

The fact that they have a rule prohibiting commercial renting implies they believe you do (or might) have a shot at making a worthwhile return.

 

[Dean]

Under nearly all conceivable conditions Disney would have constructed this (DVC) so only they make money ...or they make all the money to the maximum degree possible.

The fact that they have a rule prohibiting commercial renting implies they believe you do (or might) have a shot at making a worthwhile return.

I doubt they constructed this rule related to finances per se but rather so they truly retained control. It's a common rule with points type timeshare systems, the outlying portion is the fact they they expressly allow renting.

 

[bakerworld]

Irritates me when DVC is looked at as an investment in any other that vacation time.

 

[ELMC]

Irritates me when DVC is looked at as an investment in any other that vacation time.

Why?

 

[amypetecar]

You wouldn't make much and there are some risks. Your rental point - if you rent the easy way though David's - would get you $11 - you could probably get $12 or $13 if you rent yourself (a lot more bother). David charges $14, so at that point you are competing with brokers who can offer services like escrow and owner aggregation. So - to be conservative, lets say $11. Let's say you own SSR (sort of best case in terms of purchase price and dues, although the riskiest since not many people go looking for SSR points at eleven months - you end up with potential availability issues at seven. My BWV points are easy to rent at eleven months during Food and Wine - SSR doesn't have that sort of primary demand period). Let's say you are getting it for $75 a point purchase price - and to keep the math easy - 100 points (you can put a multiplier in there for whatever you want). So you spend $7500 on the points. This year dues at SSR are $4.91 - lets round to $5. They'll be that or higher next year. And lets use an interest rate of 5% (the dividend rate for AT&T stock or close to the dividend rate of BP - in other words, conservative interest assumptions). So in year one, each point has cost you $75 - or lets say $2 per year, plus $3.75 in TVM, plus $5 in dues, you rent for $11. you rent for $11. You have about $10.75 in costs, and make $.25 in profit. But wait, you aren't done, you have to pay taxes on the profit, but being a timeshare, your profit is rental amount - dues - so $11 - $5, or you pay taxes on $6 in profit. (At least in the U.S.). So you are looking at - say a 25% tax rate, paying $1.50 in taxes. So at this point, its cost you about $1.25 to own for the purpose of renting points. Financial math simplified and I haven't had my coffee yet.

Im not following what $3.75 per point is for? What is TVM.?

Not including inflation, interest for any loans for $7500 principle, or increasing dues

Pay $7500 in 2014 for 100 points
43 years on the term (2057 expiration)
Equals 4300 total points to use on the life of the contract
Thats about $1.74 per point in principle costs
Plus $4.91 in dues
Equals $6.65 per point in cost
Rent for $11
Thats $4.35 per point in "profit"
Thats $435 profit per year
Or $18,705 total...

Its alot of money up front for $400 per year.... Minus loan interest, risk of rising dues, risk of not finding a renter, minus taxes, and any opportunity for growth of that cash in a stock or mutual fund.

 

[crisi]

You can take that $75 and buy stock that pays a 5% dividend (and not fly by night companies either). TVM is Time Value of Money. $75 in stock that pays a 5% is $3.75. Buying a DVC point for $75 instead of two shares of AT&T is giving up that $3.75.

 

[Brian Noble]

If so, what is the % yield each year?

It depends on your assumptions re: opportunity cost of the purchase price. Under most realistic scenarios, there is a small positive return, but probably not enough vs. other investment opportunities, and it is hard to quantify the long-term risk.

 

[HokieGCC]

I doubt they constructed this rule related to finances per se but rather so they truly retained control. It's a common rule with points type timeshare systems, the outlying portion is the fact they they expressly allow renting.

Taking it to the extreme if all of us became mini commercial DVC renters we would become a significant unwanted economic force in direct competition with both DVC sales and cash bookings.

 

[DougEMG]

I’ve a spreadsheet that kind of does what you are looking at. It takes the total price per point of a contract and compares investing that money vs. renting that point out. Option 1 is easy to model, pick what your investment rate and apply that. Option 2 has a couple of extra variable such as how much MF will go up, how much rental rates will increase and it uses the same investment rate as option 1.

The big unknown variable in option 2 is how much rental rates will increase compared to MF. Rental rates seem to stay flat for a number of years and then take a jump all at once. So when modelling I use something like this: 2015-2018 $12, 2019-2022 $13, 2023-2026 $14, etc. What this ends up doing is having an annual profit of between $5.50 and $6.50 each year on the rental. The thing to remember is that 20 years from now, inflation will have made that $5 profit look like $2.50.

So given a purchase cost of $70/point, starting MF of $5.54, MF increase of 3.5% per year and an investment rate of 5% and a profit of between $5.50 and $6.50 each year on the rental, then it takes 18 years of renting before renting has a slight advantage over investing. Not something I would do.

Change that to a purchase cost of $35/point and renting wins after 7 years. And after 27 years, the rental has produced more than double the income of the investment.

Change that to $88/point and it take 27 years before renting comes ahead of investing.

In my opinion, unless you get your points at a really really low price (under $40/point) you are better off investing your money over buying points to rent out.

 

[Dean]

Taking it to the extreme if all of us became mini commercial DVC renters we would become a significant unwanted economic force in direct competition with both DVC sales and cash bookings.

Likely not but from a DVC standpoint it really wouldn't matter, DVC is a separate entity. To me, any member renting their points is the same as them using their points.

Why?

Usually when this idea is posted it's basically the idea that someone can tell others how to use the membership. The "it's OK to use it but not to rent it out" idea. Whether that's what was meant here, I don't know. A related idea that some try to use to hide their true feelings is something like "it's OK to rent but not to make a profit" which is code for it's not really OK to rent but they're not going to post their true feelings.