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

[Dean]

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

This group and similar ones are not particularly representative of the average DVC member. To a degree, I think that second statement is true for each and every one of us, the question is just to what extent.

 

[crisi]

I think there is another kind of typical DVC member - and they aren't on this board. But they aren't saving money either.

They aren't "Disney people" - they buy DVC when their kids are young because they are enchanted. They buy on vacation and buy direct. And they get home and within a few years - well.... When they bought they forgot that they have to visit Grandma every other year and can't go to Disney every time they vacation. And their oldest is ten already - he liked the first trip, but the next trip was whining about the lack of coasters and how 'stupid' Disney is. They intend to trade out, but it isn't as flexible as the guide promised. In a couple of years they are selling, having let a year or two worth of points expire without using it, and probably at a loss. Or they do use DVC to trade, they aren't here, because they aren't Disney people, but they own an expensive timeshare if trading is what they wanted.

If DVC encourages you go for longer and stay in larger rooms, DVC has done its job from a corporate perspective. You'll spend more nights, which means more TS meals - and you'll be using more points for those larger rooms. Those are the sorts of things that its difficult to factor into an ROI calculation. And, once again, they aren't bad things - if you are happy and it isn't financially difficult for you, then DVC has increased the quality of your vacations. For us we believe its contained excess cost over alternatives, but that the quality we've gotten for that cost has created good value. But that is hard to put into an accounting equations - soft benefits always are.

 

[Galun]

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.

Well, you asked me for my opinion on your inputs and assumptions, and I gave it. I don't know what others had said to you

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.

If I read correctly, you seem to think dues had been rising faster than inflation but eventually should come down to track inflation. I disagree. Disney makes a profit on dues and it is part of the return calculation for Disney as a developer. Once you buy in you are a captive customer that have to pay the dues. I think dues will perpetually increase at a faster rate than inflation. However, you would be fine if cash rental rats also increase at a rate faster than inflation. The key is whether the growth in the spread (currently at $9.16 using the most inefficient 1BR example) tracks inflation.

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 way I would look at this is to compare the IRR of DVC to the IRR of long term bond return which is the 4.5% rate that you used. Your time value of money should be constant regardless of the investment class. It doesn't matter if you apply the dollar to DVC or mutual fund - the purchasing power of that dollar depreciates at the same rate of inflation regardless of which asset you put it in.

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.

Why don't you think it's the most intuitive way? Comparing the real IRR of different assets is the most pure apples to apples comparison in my opinion.

 

[JustTinking]

They aren't "Disney people" - they buy DVC when their kids are young because they are enchanted. They buy on vacation and buy direct. And they get home and within a few years - well.... When they bought they forgot that they have to visit Grandma every other year and can't go to Disney every time they vacation. And their oldest is ten already - he liked the first trip, but the next trip was whining about the lack of coasters and how 'stupid' Disney is. They intend to trade out, but it isn't as flexible as the guide promised. In a couple of years they are selling, having let a year or two worth of points expire without using it, and probably at a loss. Or they do use DVC to trade, they aren't here, because they aren't Disney people, but they own an expensive timeshare if trading is what they wanted.

I have friends who bought a fixed week timeshare in Bethel, Maine, 10 years back. They've never been back, nor have they loaned it out. Go figure. A total impulse buy, like a momento of a cherished trip.

We went to Disney for years and stayed outside the world, in rented houses. Being DVC members for the last 10 years has made going there much more convenient and comfortable. We send family on trips probably as often as we use the points ourselves. Feels great. We wouldn't do that if we were not members. I'm not sure how one can measure the value of that.

All that said, love the math, and the different ways of looking at this. Will definitely buy in the resale market next time we purchase, as one doesn't want to just throw money away (like my friends in the first paragraph!)

 

[dmunsil]

Well, you asked me for my opinion on your inputs and assumptions, and I gave it. I don't know what others had said to you

Of course; I was just crying out to the universe.

If I read correctly, you seem to think dues had been rising faster than inflation but eventually should come down to track inflation. I disagree. Disney makes a profit on dues and it is part of the return calculation for Disney as a developer. I think dues will perpetually increase at a faster rate than inflation.

I think I get what you're saying, but that really can't be literally true. No price can increase perpetually faster than inflation. It's the magic of compounding; eventually it becomes larger than the entire money supply. Before that happens, it gets larger than anyone can pay. The prices of hotel rooms (like any other prices) must go up with inflation, though they can go up at a higher rate for a long, long time. So I'm happy to stipulate that the dues can go up faster than inflation for longer than we care about, or longer than the life of the DVC contract, but not forever.

The key is whether the growth in the spread (currently at $9.16 using the most inefficient 1BR example) tracks inflation.

Right. And it hasn't thus far for the life of DVC, which is more than 20 years, so we do have a decent history on this. I think it will in the very long run (see above), but it hasn't so far, so assuming that it will is fine for an off-the-cuff quick check, but not completely defensible.

The way I would look at this is to compare the IRR of DVC to the IRR of long term bond return which is the 4.5% rate that you used.

Sure. Perfectly valid, as long as you calculate the IRR accounting for reasonable assumptions about the long-term growth of the "payments", i.e. the discounts from room rates. For DVC, the discounts are big enough that you can be a little slapdash and it still comes out clearly a good deal. But for some cases, it's going to be closer and it'll be worth actually doing a more rigorous analysis.

If your argument is that if the quick analysis shows that it's clearly a good deal then the more rigorous analysis is a waste of time, then you got me. You're right. I just like working out the analysis.

Why don't you think it's the most intuitive way? Comparing the real IRR of different assets is the most pure apples to apples comparison in my opinion.

I think a lot of people are not super familiar with rates of return and what is a reasonable rate for comparison purposes. You meet people who think that it's perfectly reasonable to be able to expect to make 15% per year, every year. That's fine if they're Warren Buffett, but...they're not.

With NPV, you're comparing quantities that people are familiar with: dollars. I'm asking "Is it worth spending $X to get something with a NPV of $Y?" You can also fiddle with the numbers and answer questions like "How far do my assumptions about long-term cost growth or insurance have to be off before this is no longer a good buy?"

And with amortization, you're answering a question that people often have, which is "if I pay this much today for something I will use over X years, how much per year is it costing me?" Though for reasons outlined earlier, I find amortization to be somewhat problematic, because the traditional methods assume a constant nominal payment. Real situations (like DVC) do not have constant payments. And inflation means that constant nominal payments are actually declining real payments.

But don't get me wrong - IRR is yet another way to go, and if it's what you're most comfortable with, that's what's important.

 

[WIDisneyFan]

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.

I would have to agree with this post completely. To me the value of DVC for DISNEY is not in selling the properties. It is in creating a captive, dedicated audience that will return for years to come.

My family and I love DVC but we are fully aware Disney is a for profit business and is making money on the DVC sales, supporting the resorts with maintenance fees, and most importantly keeping people in the parks where we spend money on tickets, food, and souvenirs - for Disney it is win, win, win. As a member we do reap the benefits of nicer accommodations as well as other perks, but membership is not about giant savings, it is about getting more for the money we would have spent staying Deluxe (family of 5 that loves being on site). DVC is not an investment, it is at its most fundamental level a timeshare that may or may not be the right decision for everyone.

While i agree with much of the analysis in this thread, many variables can not be accounted for on a 50 year commitment. As an example, how do you place a value on trips not taken to other destinations? A pure Disney DVC to Disney Resort comparison is not completely fair - what about a trip to the Grand Canyon, Camping at a National Park,.... would the dollars spent here compared to the true DVC cost lead to a similar conclusion? In the end DVC is a luxury that my family loves to own, and is something that has already created memories we will cherish forever.

 

[myzel]

I really get a "kick" out of people trying to financially justify DVC. Sort of like trying to justify Life Insurance. Somebody else gets to spend your Life Insurance money. So how do I financially Justify DVC. I took all the equations, adjusted all the numbers, added in all the variables and then computed the real - time and up to date values. The final answer was quite a surprise. how do I financially justify DVC? DVC + Family = FUN and Enjoyment.

 

[dmunsil]

I really get a "kick" out of people trying to financially justify DVC. ... how do I financially justify DVC? DVC + Family = FUN and Enjoyment.

Look, I love Disney as well, and I love taking trips to WDW. But DVC is just a way of paying for hotel rooms. Cash + Family = FUN and Enjoyment as well, right?

I'm kind of mystified by this attitude from folks that DVC isn't something you can or should analyze as a discount on a place to stay. Did you really not think DVC was going to save you money when you bought? Why would you spend a ton of money on a vacation program if you didn't think there was some kind of benefit to it? Is there something ineffable about DVC that makes it better than just paying cash to go to Disney? Isn't the primary selling point that it saves you money?

I mean, it does in fact save you money. So yay us! But if it turned out it didn't save you money (or let you stay in nicer places for the same money) wouldn't you feel like you had bought a pig in a poke?

 

[DougEMG]

Look, I love Disney as well, and I love taking trips to WDW. But DVC is just a way of paying for hotel rooms. Cash + Family = FUN and Enjoyment as well, right?

Exactly, DVC is just a discount program, afterall you could stay in the exact same room with way more flexiblity by booking the room with cash. So every single person bought because they thought it would save them money over paying cash.

 

[ELMC]

Exactly, DVC is just a discount program, afterall you could stay in the exact same room with way more flexiblity by booking the room with cash. So every single person bought because they thought it would save them money over paying cash.

What you say is true, and there's more to it than just saving money...there's the certainty aspect to it all. We know in advance what the points charts are and how much certain rooms are going to cost at certain times of the year. We also can take educated guesses as to what availability will look like as well. With cash rooms, we are are the mercy of Disney. Will there be a discount code or not? Will it pertain to the dates we want? What will the rate be? Everything is a variable. Personally I find that stressful, which is just one more reason why I enjoy owning DVC.

 

[crisi]

We didn't. We thought we'd stay in better accommodations more reasonably. We knew it was going to cost us MORE, but we also knew that it was an affordable way to bring friends and family (something that wouldn't be affordable with cash) and/or put the kids in their own room.

i.e. it was a better value, but it wasn't anything done to save money over paying cash. We'd never have booked a two bedroom timeshare unit on property if we didn't own. We'd stay in Deluxe resorts and put four of us in a hotel room.

 

[DougEMG]

What you say is true, and there's more to it than just saving money...there's the certainty aspect to it all. We know in advance what the points charts are and how much certain rooms are going to cost at certain times of the year. We also can take educated guesses as to what availability will look like as well. With cash rooms, we are are the mercy of Disney. Will there be a discount code or not? Will it pertain to the dates we want? What will the rate be? Everything is a variable. Personally I find that stressful, which is just one more reason why I enjoy owning DVC.

I've heard lots of members complain that they can't get a room with points, but they can with cash

 

[DVCanadian]

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.



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.

dmunsil, I'm loving this thread and find your analysis clear and helpful. But all this discussion has got my mind thinking about price connection to depreciation.

Can you explain why DVC membership is more like a bond than a tractor?

DVC has a defined life (50 years) with a defined point total. Each year the points expire, so using straight-line depreciation DVC should decline 2% per year until $0.

I've been thinking about the re-sale price and the connection to depreciation in an attempt to spot a good deal or see if the market is properly pricing re-sale contracts.

I was looking at my SSR contract. The original purchaser paid full price from Disney for 50 years of points. Assuming they paid $95 per point that is $1.90 for each of those points.

If someone wants to buy SSR today, let's assume that 10 years have been used, so 40 years remain. The re-sale price then "should" be 80% of the original cost as only 80% of the points remain.

If you can get SSR for $55 PP today that is around $1.38 per point or 72% of the original (not adjusted for anything) price.

You can buy from Disney for (not sure of the price today) $130 per point for 40 years, or $3.25 per lifetime point. Wow that seems expensive.

There are a lot of other factors not listed above, I get that. Inflation, current dollars, re-sale restrictions on use for cruises etc that impact the perceived value of the re-sale contract.

Anyway the depreciation and link to re-sale price has been rattling around in my head for a while. Seems like a good thread to get some input.

 

[dbs1228]

We didn't. We thought we'd stay in better accommodations more reasonably. We knew it was going to cost us MORE, but we also knew that it was an affordable way to bring friends and family (something that wouldn't be affordable with cash) and/or put the kids in their own room.

i.e. it was a better value, but it wasn't anything done to save money over paying cash. We'd never have booked a two bedroom timeshare unit on property if we didn't own. We'd stay in Deluxe resorts and put four of us in a hotel room.

We bought not to save money but to stay in larger accommodations!

 

[bighoo93]

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.

This doesn't make any sense to me at all. Why do you say we're quibbling over how much money I'm throwing away? As you have acknowledged, staying at a DVC resort instead of a value hotel is worth the cost to me. By definition, that isn't throwing money away.

Actually, staying at a particular DVC resort and room and staying at a particular DVC resort and room ARE the same thing. How much they cost using different mechanisms (buying DVC, renting points, or cash reservation) is what differs. If you are going to stay at a DVC resort, finding a less expensive way to do it than you otherwise would is saving you money. I rented DVC points for our last stay and that cost $2800. My next stay in the stay in the same accommodations will cost around $1000. That is saving money. Of course, then you have to account for the purchase price and time value of money, etc., which is what this whole thread is about. Estimating this isnt necessarily simple, but I cannot agree that you can't or don't save money with DVC. For me and likely most people, there is very little reason other than that to buy in to DVC.

I understand that some people are going to go to Disney come hell or high water, and they'll stay in whatever resort is in their budget. If they buy into DVC they can stay at a better place for the same cost, and by some strict definition, someone could say they aren't saving money. They are just getting more for the same money. I'll concede that. It's a semantic argument that doesn't interest me.

 

[CarolMN]

Very few people actually end up doing what they said they would when they did their initial financial analysis, assuming they did one at all.

I know this has been mentioned before, but IMO, it is key, and the largest single reason that most DVC members do not save money by buying DVC.

Most DVC members - at least most of those who post here, lol, end up going more frequently or staying longer or staying in larger villas than they originally planned to do.

Many also treat friends and family and most of those would NEVER do that if they were paying cash. Love my brother dearly, but I would never pay cash for his family's WDW vacation!

Some (who don't post here), actually let their points expire without using them if they can't go during a particular year.

Even a perfect analysis falls apart given the human factors involved with DVC. But I enjoy seeing the financial analyses, anyway.

 

[bighoo93]

Very few people actually end up doing what they said they would when they did their initial financial analysis, assuming they did one at all.

I know this has been mentioned before, but IMO, it is key, and the largest single reason that most DVC members do not save money by buying DVC.

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.

 

[dmunsil]

Can you explain why DVC membership is more like a bond than a tractor?

Two reasons: because it's an abstract thing that doesn't actually physically decay, and because it's something that throws off financial value in a predictable way over its lifespan.

In fact, it's really similar to a specific US Treasury bond: a TIPS (Treasury Inflation-Protected Security). The payment on a TIPS goes up over time to match inflation. A DVC membership's payments (the room discounts) go up over time, matching the gap between cash prices and membership dues. This has gone up faster than inflation. You could see a DVC membership as a TIPS bond that is indexed to Disney hotel prices and doesn't give you back any principal at the end of the period.

Straight-line depreciation is really not even about the time value of money. It's about the useful lifespan of something that wears out. People buy machines and tools, knowing that they have a planned lifespan, and they want to spread the cost across the life of the tool. Straight-line is the least accurate of the various common ways to account for depreciation, but it has the virtue of being simple and easy to understand. You can do it on a piece of paper.

For short periods, like less than 10 years, the errors caused by ignoring time value of money are not too bad, especially if you're really just trying to get a handle on business expenses. But when you're dealing with a financial instrument like a bond, it's important to be rigorous and actually calculate out the interest. That's kind of the point of a bond. Plus if you don't do it, you can get cheated by something that looks like it's just as valuable using a straight-line analysis.

A DVC deed lasts at least 29 years and up to 50, depending on resort. Over those time spans straight-line gets wildly off, like by double or triple per year.

Also, keep in mind that because of the time value of money, the actual Net Present Value (NPV) of a DVC membership in nominal (i.e. non-inflation-adjusted) dollars can go up for quite a few years after the resort opens. The reason is that the value of the membership (the discounts on rooms) goes up in nominal dollars each year, so the biggest discounts are at the end. As you get closer and closer in time to those later discounts, their Present Value goes up. At the beginning of the time span, getting one year closer to those big discounts is actually worth more than the current year's discounts. Counterintuitive but true.

Of course, all of this analysis is predicated on the idea that nothing will change radically in the future and that the discounts will go up in a relatively predictable way. DVC has been around for 20 years and in fact the discounts have gone up in a relatively predictable way thus far, but that's not a guarantee that it will continue.

 

[dmunsil]

Most DVC members - at least most of those who post here, lol, end up going more frequently or staying longer or staying in larger villas than they originally planned to do.

Yes, but that's sort of normal. If you see the DVC benefit as primarily financial, you can consume that many ways. You can go and stay in the same resorts as before and bank the savings, or you can use the windfall to live higher on the hog. I think most of us tend to live better when we get more money rather than save that extra money. So DVC isn't different from cash in that regard.

When you get a raise at work, you could live exactly the same way as before, but most people actually spend more because they can. Same thing. Doesn't mean that DVC isn't a financial benefit.

Many also treat friends and family and most of those would NEVER do that if they were paying cash. Love my brother dearly, but I would never pay cash for his family's WDW vacation!

This really is true, and I totally agree that it's about the psychology of ownership rather than renting. One of the things that people love about the idea of owning a vacation home is that they can let their friends and relatives use it for free. But you'd never tell your friends and relatives that you're going to just pay for their hotel next time they go on vacation.

From a pure economics point of view, letting your friends stay in a vacation home that you could rent for money is the same as just paying them money so they can stay in a vacation home. But psychologically, it's totally different. Because people aren't robots. Which is a good thing, right?

 

[RSWA2]

Many also treat friends and family and most of those would NEVER do that if they were paying cash. Love my brother dearly, but I would never pay cash for his family's WDW vacation!

This is very true, I've mentioned to my friends, that if they were interested, let me know about 11 months before and we can all go together, your room will be free. If I didn't own DVC, I would not pay cash for a 2 bedroom or larger and not expect them to cover their fair share. The 'fun' part of owning DVC out weighs the cash value of it though, since it would really be hard to put any type of monetary value to it. As dmunsil said, People aren't robots.

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.

Some (who don't post here), actually let their points expire without using them if they can't go during a particular year.

Even a perfect analysis falls apart given the human factors involved with DVC.

This is what I suspect is what Disney sees. They sell you the DVC, saying how you are getting such a great deal over hotel rates for 50+ years. No sales person is every going to purposely sell a product at a loss for their business (other than loss leader products). Disney is banking on the fact that the general DVC owner will 'forget' to use their points or just not use them, or their plans change and they trade their points or buy more points. If every so often a Disboard DVC owner forgets to bank their points or lets less than 10 points go to waste each year, imagine how much the other 90% of DVC owners are doing.

When you get a raise at work, you could live exactly the same way as before, but most people actually spend more because they can. Same thing. Doesn't mean that DVC isn't a financial benefit.

They always say that the best thing to do is to save that net raise and live the same as before, if your current lifestyle did not change. I agree, I doubt most people do this, as isn't that why you hard so that you can earn more and spend more? I try really hard to time an increase in my auto savings, such as 401k, with my raises. If we all did the right things with money and not let the emotional aspect come in to play, we are robots.