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

[crisi]

My take on the time value of money is that the equation has to include the annuity for using the principal to pay for cash accommodations. And that, by the time you add in an inflation constant to thy, y are coming kind of close to making stuff up, and having so many numbers running around the equation with so many plugs, it more of an exercise for us math geeks. Moreover, for our family, where the true cost has been is not in owning- buying and paying maintenance fees- but in using. Park tickets, food and airfare have all increased in cost faster than expected, but for our family Disney was never the given. The simplistic version probably works fine for most people, because they don't have the discipline to invest the principal.

And that in the end, this is something that allows you to enjoy vacations. You can afford it, or not. You'll never save more money with DVC than you would making a dozen other choices, including staying away from expensive WDW, staying in values, cheaper timeshares. If you can afford it, it'd like owning a nice car. Your Mazda Protege will get you where you are going, but the BMW is more fun to drive.

 

[lawboy2001]

You'll never save more money with DVC than you would making a dozen other choices, including staying away from expensive WDW, staying in values, cheaper timeshares. If you can afford it, it'd like owning a nice car. Your Mazda Protege will get you where you are going, but the BMW is more fun to drive.

I love the way you put it. If Disney reps troll these boards, they'll probably note that comment down to use in their sales presentations!!

 

[dmunsil]

The calculation is garbage in garbage out and can justify whatever conclusion you want.

Hey, I'm cynical, but I'm not that cynical.

I'm trying to make realistic assumptions here. If you actually think my assumptions are unrealistic, I'd appreciate a pointer as to how and why. The point is not to be a cheerleader for DVC or to make DVC look bad; it's to check assumptions about where and when DVC makes sense and what is the best way to get the most value out of it.

And that in the end, this is something that allows you to enjoy vacations. You can afford it, or not. You'll never save more money with DVC than you would making a dozen other choices, including staying away from expensive WDW, staying in values, cheaper timeshares. If you can afford it, it'd like owning a nice car. Your Mazda Protege will get you where you are going, but the BMW is more fun to drive.

I totally get what you're saying here, but I not sure I think it's a perfect analogy. DVC isn't like a Rolex or a pair of fancy shoes where it's a pure luxury. It's not like a BMW where it actually goes faster and has lots of high-end extras. It's a discount program that at its core promises to save you money. Analyzing it financially makes tons of sense.

I mean, something else that allows you to enjoy vacations is cash. Cash is super useful for vacationing. When you buy into DVC, you're trading a very flexible vacation tool, cash, for a special kind of private currency called "DVC points," which isn't as useful as cash. So it darn well better have something else going for it, like saving you a significant amount of money.

It seems to me that some years back when my sister bought into DVC, it was actually hard to book DVC rooms for cash, so there was an exclusivity component to DVC. If you wanted something like a 2-bedroom, you really needed to own DVC to have a shot at booking it. That's very different now (or my memory is wrong) because it's easy to book any DVC room you want with cash, even at peak times. There appears to be a glut of cash DVC room inventory right now. So comparing DVC points to cash is an absolutely reasonable comparison.

The pitch that people get for buying DVC is primarily that they'll save money, or that they'll be able to stay in deluxe resorts for what they're paying today for moderate resorts (which is still saving money, IMO). And for the most part that pitch is absolutely true, as long as members use their points for DVC resort stays. If they use their points for cruises, Disneyland hotels, etc., they're actually losing money over just using cash. A simple analysis of DVC suggests that cruises are still cheaper using DVC than they would be with cash, but a better analysis incorporating Time Value of Money shows that they're actually not a good value at all unless you bought your points at rock-bottom prices. I think that's useful to know.

And yes, you can spend way less money on vacations by staying off site. MouseSavers has some super great deals and I've stayed in those hotels and they're nice hotels and the rates are good. But it's not the same thing. To me, that's not actually "saving money". That's "buying something cheaper." Saving money is (to me) all about getting the same thing for less money. That is the promise made by DVC and that's the promise that's worth digging into.

 

[Rob S.]

There are some of us that figured out Disney was a good deal without the formal analysis. Others could care less and yet to others, no analysis will yield a positive reason to buy DVC. However you get here, if you decided to buy, and if you are happy that you did and remain happy that you did, no analysis can change that. Whether you financed so that you could take your children before they were no longer children or paid cash because you could, it doesn't matter. The joy you bring yourself, and likely the magic you bring a child makes it more than worthwhile in my opinion. None of us are guaranteed our next vacation, we need to make the best of this vacation.

I agree 100%!
I make a living being a "numbers" guy and I did not do a full blown financial anylysis prior to purchasing (and adding on several times). There are certain intangibles that you can not assign a value to.

 

[crisi]

Hey, I'm cynical, but I'm not that cynical.

I'm trying to make realistic assumptions here. If you actually think my assumptions are unrealistic, I'd appreciate a pointer as to how and why. The point is not to be a cheerleader for DVC or to make DVC look bad; it's to check assumptions about where and when DVC makes sense and what is the best way to get the most value out of it.



I totally get what you're saying here, but I not sure I think it's a perfect analogy. DVC isn't like a Rolex or a pair of fancy shoes where it's a pure luxury. It's not like a BMW where it actually goes faster and has lots of high-end extras. It's a discount program that at its core promises to save you money. Analyzing it financially makes tons of sense.

I mean, something else that allows you to enjoy vacations is cash. Cash is super useful for vacationing. When you buy into DVC, you're trading a very flexible vacation tool, cash, for a special kind of private currency called "DVC points," which isn't as useful as cash. So it darn well better have something else going for it, like saving you a significant amount of money.

It seems to me that some years back when my sister bought into DVC, it was actually hard to book DVC rooms for cash, so there was an exclusivity component to DVC. If you wanted something like a 2-bedroom, you really needed to own DVC to have a shot at booking it. That's very different now (or my memory is wrong) because it's easy to book any DVC room you want with cash, even at peak times. There appears to be a glut of cash DVC room inventory right now. So comparing DVC points to cash is an absolutely reasonable comparison.

The pitch that people get for buying DVC is primarily that they'll save money, or that they'll be able to stay in deluxe resorts for what they're paying today for moderate resorts (which is still saving money, IMO). And for the most part that pitch is absolutely true, as long as members use their points for DVC resort stays. If they use their points for cruises, Disneyland hotels, etc., they're actually losing money over just using cash. A simple analysis of DVC suggests that cruises are still cheaper using DVC than they would be with cash, but a better analysis incorporating Time Value of Money shows that they're actually not a good value at all unless you bought your points at rock-bottom prices. I think that's useful to know.

And yes, you can spend way less money on vacations by staying off site. MouseSavers has some super great deals and I've stayed in those hotels and they're nice hotels and the rates are good. But it's not the same thing. To me, that's not actually "saving money". That's "buying something cheaper." Saving money is (to me) all about getting the same thing for less money. That is the promise made by DVC and that's the promise that's worth digging into.

A vacation at all is a pure luxury. At least for a lot of people, a car is a necessity (we don't have workable public transportation where I live).

This is a little like my husband, who tried to cost justify a Tesla. Between the gas savings and the tax break and the unproven resale value, it was vaguely comparable. But the assumptions were huge.

And I'll say what I've said before, if you have to justify it, you can't afford it. Its when the numbers don't make any difference if they come out on savings or not that you can afford it. If you need the numbers to work out, then you shouldn't buy. Granted, the numbers are lots of fun for those of us who are accountants and math geeks (I'm both).

 

[Galun]

Hey, I'm cynical, but I'm not that cynical.

I'm trying to make realistic assumptions here. If you actually think my assumptions are unrealistic, I'd appreciate a pointer as to how and why. The point is not to be a cheerleader for DVC or to make DVC look bad; it's to check assumptions about where and when DVC makes sense and what is the best way to get the most value out of it.

I just think you have introduced too many variables. You are discounting the purchase price with an assumed spread between arbitrary mutual fund return of 4.5% and assumed inflation of 2%. Then you make further assumptions on the spread between annual dues increase of 3.5% and inflation of 2%. I don't see why you need to introduce so many variables, especially mutual fund returns, into the DVC calculation. Calculate the IRR of DVC and if it's higher than mutual fund with acceptable risk then you put your money into DVC.

I do think using rack rates to compute your spread is unrealistic because of usage restrictions and flexibility in DVC relative to rooms on rack rates.

 

[a742246]

When I bought into DVC I used spendable money meaning if I didn't spend it on DVC I would have spent it on something else. To me, DVC was one of my best "spendable" money ideas I spent. Sure I could saved and invested all my spendable money but for what???? You have to balence life. If you don't, life will pass you by.

I use DVC as a mental health expense. Is it expensive? Yes and no. You be the judge.....

PS. I got started into DVC by buying one resale contract per year (in 50-75 point increments) after renting. I am now up to 315 points. Do I regret buying into DVC? Not at all.

 

[DougEMG]

With DVC the deal is you pay more up front to eventually get savings in the future.

What I was interested in was where that future point was (not what my costs are over 50 years), in otherwords when do I start saving money over other options. I'm not going to buy DVC if it takes 20 years before I start seeing any savings, too much can happen over 20 years. The less years to you breakeven, the less chance that something could go wrong (like losing your job, getting bored with going, becoming afraid of flying, gas prices sky rocketing, etc).


So I prefer to model out the various options and compare them. I'm not an accountant, so it makes it easier for me to think things through if I can setup a model. Plus I can track against these models to make sure things are working as expected.

The different approaches I used were:
(1) take the purchase price, invest it, add MF to the investment annually, deduct my annual trip costs, deduct taxes and see how long before I run out of money.
(2) Take $X, invest it. Take $X buy DVC and rent out points (rental rates are the value I assign to points even when I use them). When do I have $X back from renting out the points. So at that point in time I have $X + investment income or $X + value of DVC. Is the value of the DVC greater than the investment income to me and what year does that happen in.

My personal preference was to have a breakeven point of 8 years or less.

Buying loaded contracts at resale prices, the numbers worked out for me and I'm extremely happy with my ownership.

Does owning save me money, not really. What it does do is reduce my average costs per day, I just go for a lot more days now, so total costs are up. Pre-DVC I only went for 10 days max in a year, now I go anywhere from 20-50 days a year.

 

[bighoo93]

And I'll say what I've said before, if you have to justify it, you can't afford it. Its when the numbers don't make any difference if they come out on savings or not that you can afford it. If you need the numbers to work out, then you shouldn't buy. Granted, the numbers are lots of fun for those of us who are accountants and math geeks (I'm both).

I don't quite agree with this. I can afford it, but that doesn't mean it makes no difference how the numbers work out. I have the money to spend on vacations. But if the numbers don't work out for DVC, I'm just wasting money. One reason I have some money set aside for vacations is because I don't just throw it away.

 

[crisi]

I don't quite agree with this. I can afford it, but that doesn't mean it makes no difference how the numbers work out. I have the money to spend on vacations. But if the numbers don't work out for DVC, I'm just wasting money. One reason I have some money set aside for vacations is because I don't just throw it away.

Then why don't you stay offsite? You stay at Disney because that is where the value is for you. You stay DVC because that is a better vacation to you than values. So we are just quibbling about how much more you are willing to throw away.

But you say, those aren't the same things. But owning DVC and the other options (renting point, paying cash, owning a different timeshare and trading in) aren't the same thing either. Each one might have similar end results in terms of where you stay - a DVC resort. But each has a different level of commitment, cost and risk. It may not be apples to oranges, but its Gala to McIntosh.

 

[hapablap21]

I've read your first post a couple of times, and I keep coming back to the same question - why do you care about an annualized cost?

If you're comparing contracts across resorts or comparing DVC to simply not buying at all, then a lump sum NPV seems like it'd matter far more than an annualized cost.

If you're comparing DVC to cash Disney rates, the "all-in cost" of a point is kinda irrelevant. The only thing that matters is the market value of a point, and that's more or less known.

If you're comparing buying DVC to the market value of a point, then I think that seeing the purchase as a depreciating capital asset (with a straight-line depreciation schedule) makes sense. Largely because the only year that matters in that comparison is the current year.

Ultimately, though, why would anyone ever care what the cost of a single point will be in 10 years? You're buying it now.

 

[RSWA2]

It doesn't explain Hilton Head, Vero Beach, and Aulani. There's no park nearby to make money on, so the resort itself must make money.

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.

 

[ImagineerTHAT]

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.

 

[Galun]

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.

The developer of a timeshare makes money from three sources: sales of timeshares, maintenance fee from sold timeshares, and rental income from unsold timeshares. The project has to be self sustainable and generates profit on its own over the expected lifetime of the development or it would not be developed. I bet the internal rate of return of the off-site Disney projects are at least the same if not better than the on-site properties.

 

[dmunsil]

A vacation at all is a pure luxury. At least for a lot of people, a car is a necessity (we don't have workable public transportation where I live).

I think this is a great way to think about vacations in general. But "Can I afford to take vacations?" is not the question I'm trying to answer. The question is, "Given that I'm going to go on vacations at Disney World, will this specific vacation program (DVC) save me money?" (Well, I've actually answered that question a long time ago, but now I'm just trying to look at it from some other angles to see if anything interesting comes up.)

If DVC doesn't save me money, I don't need it. I don't even want it. I don't get anything important or exclusive through DVC. I can always spend cash for exactly the same rooms. This is not a decision about a luxury. DVC is not, in itself, any kind of luxury. Taking vacations at Disney World is a luxury; DVC is a discount program.

Is your feeling that people weren't thinking about going to Disney World at all, but talking to the DVC sales people made them think they'd start going a lot more often? That doesn't really describe me or anyone I personally know, but we might not be representative. We were all going to WDW pretty regularly, and staying on property at Deluxe resorts, so DVC seemed pretty clearly to be a way of getting a discount on what we're already doing. So then the question is, as with any discount program, "What's the catch?"

I've never been on a DVC tour or heard the pitch. Don't they emphasize the money savings? Isn't that the primary selling point? I mean, sure, they must talk about all the wonderful vacations and cruises and stuff, but what are they telling you you're getting for your massive sums of money? Don't they sit you down with a calculator and figure out how much you're paying for hotels now and how much it'll be with DVC?

 

[dmunsil]

I've read your first post a couple of times, and I keep coming back to the same question - why do you care about an annualized cost?

It's convenient to think of something that you experience over time as an annualized cost. It's a discount program that pays off over X years. Don't you want to know what it costs on an annual basis?

If you're comparing contracts across resorts or comparing DVC to simply not buying at all, then a lump sum NPV seems like it'd matter far more than an annualized cost.

I agree. Which is why the first analysis I posted, a few weeks ago, was an NPV calculation.

http://disboards.com/showthread.php?t=3122744

If you're comparing DVC to cash Disney rates, the "all-in cost" of a point is kinda irrelevant. The only thing that matters is the market value of a point, and that's more or less known.

I disagree. As multiple people have pointed out, there's no law that says that it can't cost people more than the rental value of a point to buy and maintain a point's worth of DVC. It's worth looking at the actual cost. Plus, even though you know the "market value" of a point, how do you know whether you are getting a good or bad deal if you don't do an annualized cost analysis? Or an NPV analysis, which is better but somewhat harder.

But as I said at the beginning, this thread is specifically a reaction to people dividing the buy-in cost by the number of years to get a "cost per year". For something that lasts, say, 3 years that's totally close enough. For something that lasts 47 years, that calculation is not just off, it's wildly off.

If you're comparing buying DVC to the market value of a point, then I think that seeing the purchase as a depreciating capital asset (with a straight-line depreciation schedule) makes sense. Largely because the only year that matters in that comparison is the current year.

Straight-line depreciation is a way of roughly (very roughly) accounting for the cost of a piece of equipment that wears out over time. Tractors are costed using straight-line depreciation, if the person doing the depreciation is not too concerned about correctness and just wants something simple. Bonds are not costed via straight-line depreciation, and with good reason. DVC membership is more like a bond than a tractor.

Ultimately, though, why would anyone ever care what the cost of a single point will be in 10 years? You're buying it now.

People care about the annualized cost, because it's convenient. That's why people do the simple dividing thing. I'm just trying to say: don't do that.

 

[dmunsil]

I just think you have introduced too many variables. You are discounting the purchase price with an assumed spread between arbitrary mutual fund return of 4.5% and assumed inflation of 2%. Then you make further assumptions on the spread between annual dues increase of 3.5% and inflation of 2%. I don't see why you need to introduce so many variables, especially mutual fund returns, into the DVC calculation. Calculate the IRR of DVC and if it's higher than mutual fund with acceptable risk then you put your money into DVC.

I do think using rack rates to compute your spread is unrealistic because of usage restrictions and flexibility in DVC relative to rooms on rack rates.

Man, I can't win on this. If I don't account for all the things that can change separately, people say there aren't enough variables. Now you're saying there are too many variables.

Look, there are all these variables because all of these things have been historically different. The rate of increase of DVC dues has been higher than inflation. The inflation rate is not the same as the long-term bond rate. So they're in there. Personally I think eventually dues and cash rates are going to have to track inflation, because if they don't eventually no one will be able to afford to go to WDW. But I don't know how long before they settle down. Could be a long, long time. But using the historical average rate of dues increase is defensible.

The mutual fund rate is the proxy for the implied interest rate which is sort of central to any NPV or amortization calculation. The long-term rate of return of several different bond funds has been 4.5%, so that's my nominal time value of money. The Fed's long-term inflation target is 2%.

The reason you don't need an interest rate as an input for your calculation is that you're taking all the other variables and figuring out a rate. Which is another way to look at it. I don't think it's the most intuitive way, but it's certainly a mathematically valid way.

 

[Dean]

My take on the time value of money is that the equation has to include the annuity for using the principal to pay for cash accommodations. And that, by the time you add in an inflation constant to thy, y are coming kind of close to making stuff up, and having so many numbers running around the equation with so many plugs, it more of an exercise for us math geeks. Moreover, for our family, where the true cost has been is not in owning- buying and paying maintenance fees- but in using. Park tickets, food and airfare have all increased in cost faster than expected, but for our family Disney was never the given. The simplistic version probably works fine for most people, because they don't have the discipline to invest the principal.

And that in the end, this is something that allows you to enjoy vacations. You can afford it, or not. You'll never save more money with DVC than you would making a dozen other choices, including staying away from expensive WDW, staying in values, cheaper timeshares. If you can afford it, it'd like owning a nice car. Your Mazda Protege will get you where you are going, but the BMW is more fun to drive.

To be truly accurate one has to reduce any investment amount by the dollars spent from that pool for a given vacation. In terms of DVC, it'd be the amount spent on accommodations that wouldn't be spent if one owned DVC that was above the applicable maint fees for those number of points in the comparison group.

As I've said, much of this is psychology and people trying to talk themselves into something they want. Hence using rack rates for DVC as a comparison and comparing to a studio then getting larger units over time.

I don't quite agree with this. I can afford it, but that doesn't mean it makes no difference how the numbers work out. I have the money to spend on vacations. But if the numbers don't work out for DVC, I'm just wasting money. One reason I have some money set aside for vacations is because I don't just throw it away.

I'm sure Crisi is being more general. First, can one truly afford to go on vacation. Many do that can't. Then one must decide what the budget is and does it include on property. Then up a level or 2 to get to a 30-50 year timeshare commitment. It is my opinion that if you have to finance it or if you have other non mortgage debt, you can't afford it at that time, by definition. Put another way, one should ask how much it costs, not what the payments are if they're making reasonable and sound decisions.

 

[crisi]

Is your feeling that people weren't thinking about going to Disney World at all, but talking to the DVC sales people made them think they'd start going a lot more often? That doesn't really describe me or anyone I personally know, but we might not be representative. We were all going to WDW pretty regularly, and staying on property at Deluxe resorts, so DVC seemed pretty clearly to be a way of getting a discount on what we're already doing. So then the question is, as with any discount program, "What's the catch?"
?

I think that for the majority of DVC owners, DVC is a more effective way for Disney to pull cash from your pocket. They do this a number of ways, and you may or may not realize it. And it isn't all bad.

You take extra trips. How many once a year people became members and slip in another trip to see the Christmas decorations or run a marathon? You book bigger rooms, how many of us would be staying in a multiroom unit without DVC? You treat friends and family. Not having a hotel bill at the end, and having taken many trips, you treat yourself - Cirque tickets, illuminations cruises, tours. When your family is a little broke and maybe would skip a Disney vacation because money is tight, you go anyway...the room is paid for. Or you visit Disney, even though your teens would like a beach in Jamaica or skiing in Vermont.

Now, I like having the kids in a different room. And I like the trips we've treated friends and family to. But if I think that there is more money in my pocket now than when I signed up for this deal, I'm fooling myself. It's been a good value, but it has cost me far more money than paying cash for hotels. Now, as long as I can afford it, and I can, and I'm happy, snd i am, it's still been a value.

I do think that for a very few people, they do save money with DVC. They can afford the risk and the initial investment, they don't change their habits at all, they are disciplined in their use. But I really do believe that those members are the exception. The real issue, as Dean said, is the psychology. Not the numbers.

 

[dmunsil]

I think that for the majority of DVC owners, DVC is a more effective way for Disney to pull cash from your pocket. They do this a number of ways, and you may or may not realize it. And it isn't all bad.

I do think that for a very few people, they do save money with DVC. They can afford the risk and the initial investment, they don't change their habits at all, they are disciplined in their use. But I really do believe that those members are the exception. The real issue, as Dean said, is the psychology. Not the numbers.

I think you're probably right. For us, we got more points than we really need, partially because a great contract came along and I figured there were ways I could lay off points we don't need (i.e. renting). We're unlikely to go to WDW more often, I think. We do like WDW, but we don't actually want to go multiple times a year, and we're all the way over on the other side of the country so we can't just pop in for a long weekend. We might go for a little longer. But really, to the extent we upgrade we'll just stay in larger rooms, which really isn't inducing us to buy any more stuff. We already ate mostly table service meals at dinner and ate in the room at breakfast. I don't see us buying more souvenirs.

Time will tell. But it seems to me the only change is that we're getting better accommodations. I don't see us staying longer or spending more. But having nicer rooms is a nice bonus, and our cost as I figure it is actually a little less than we were spending on normal hotel rooms, with discounts. And we know our way around discounts, believe me.

But maybe we're not representative of most DVC members. Or maybe we're kidding ourselves. Maybe both!