DVC Financial Analysis

[DVC Mike]

DVC Financial Analysis

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In the "Does DVC Membership Make Sense?" thread, I said I wasn't going to try to present a detailed financial analysis, as that gets very complex pretty quickly, factoring in the time value of money and opportunity cost.

Well, I found an Excel spreadsheet on the Internet. You plug in your own purchase information and assumptions into the model, and it does a cost comparison - including the time value of money. (MouseSavers.com has an equivalent)

For those interested in a discussion of renting points versus buying DVC, see the "Why should I buy DVC if I can just rent points?" thread.

For those into finance, I’d appreciate any feedback on the model (as I'm a technologist and not a financial analyst).

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The first tab is for VGF and the second tab is for PVB. You plug in:

• Number of points
• Cost per point
• Closing fees
• Equivalent number of nights in a Disney hotel
• Disney hotel rate (be sure to include taxes)
• Initial annual dues per point
• Assumed rates of increase for annual dues / hotel
• Discount rate – what you would expect to earn if you invested the money

The third tab covers the case of buying points only to rent them. The internal rate of return (IRR) is calculated. You’d compare this to would you would expect to earn over the long run by putting your money in a diversified stock fund.

All the numbers in the yellow cells are meant to be changed by you to reflect your own situation. It's just a model.

Please set your own realistic expectations for the annual dues increase and the discount rate for cash flows, as the figures in the spreadsheet are just placeholders. In terms of the discount rate, pick a ROI that you could actually achieve year-over-year.

While this is an interesting intellectual exercise, The bottom line DVC equation for me is:

family + good times + Disney = Happiness

DVC wasn't a financial decision for me.

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Disclaimer: I am not a financial professional. Please don't rely solely upon the information in this post in making any decision on whether to purchase a DVC membership.

I'd also like to quote Don Munsil of MouseSavers on this topic:

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

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

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

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

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

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

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

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

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

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• A Comprehensive Introduction to DVC
• Does buying DVC make sense?
• Should I buy direct from DVC or buy resale?
• Choosing your home resort: what to consider?
• The DVC Annual Dues Information Thread
• Why buy DVC if I can keep on renting points?
• Adding on points and owning at more than one home resort
• History of DVC direct sales prices
• Purchasing a Guaranteed Week?
• Understanding Your Use Year
• A financial analysis of buying DVC
• Choices in deeding your DVC purchase
• What were your concerns about becoming a DVC member, and how did you overcome them?
• How familiar were you with your home resort when you first joined DVC?
• An explanation of renting points
• DVC Resort Information

http://i235.************************************************************* DVC Mike - *******.com

 

[DVC Mike]

The fact that there hasn't been any response to this thread proves to me that most DVC members really don't care if they saved the money they thought they would.

Many of us purchase DVC to improve the quality of our stay by booking the larger 1- or 2-bedroom units with space to separate you from the kids, with a full kitchen, washer/dryer, and other “home-away-from-home” amenities. Or perhaps we just want to lock-in an annual Disney vacation or join because you find membership emotionally satisfying (you “own a piece of the magic”).

Financial considerations weren't high on my list. Yes, I may have used the idea of locking in future vacations by pre-paying for them at a reduced rate as justification for my purchase, but I never have analyzed if I actually saved money.

I've added on 32 times and never did a financial analysis for any of those purchases.

 

[suebeelin]

I did lightly take financial analysis into consideration. Ultimately, I wanted to stay in a nice place, save money, in a vacation that I could foresee doing for years,

I estimated that we we would go to Disney once every other (or every 3) year if paying cash. Our max cash rate was $350 plus tax (so appx $400/night). We only wanted to stay in a near park resort.

We stayed at boardwalk for that rate. Immediately afterwards we purchased BWV resale. I estimated it would take 7 trips to recoup our monies (but staying in a 1bd instead of studio).

Our vacation habits changed immediately after the purchase. We started going every year. One trip we invited 10 families (friends and family) to stay in a studio for 3/4 days each!! It was so fun.

We subsequently purchased BLT.

Now our financial analysis has changed. I calculate price of points per year, and our properties are in the realm of $8/9 per point including maintenance fees plus initial purchase price. I then use that analysis to calculate our room costs . Much easier.

We use dvc more than we expected, and enjoy it more than we initially anticipated. So we feel good.

 

[CarolMN]

IMO, most of the buying decisions have a heavy emotional factor. Those are impossible to quantify, LOL.

Working in the financial services industry, I have trouble with most of the rate of return assumptions people use in their assumption set. First of all, historical returns are no guarantee of future returns.

Second and perhaps more important, no mutual fund or stock returns the same percentage each year. Returns vary - they go up some years and down others, and there is no knowing which it will be in any given future year. (That mutual fund might average 5%, but that is over many years and if the first few years of returns are bad/negative, your vacation fund will run out of money much faster than if the first few years of returns are good). To account for that, one really needs to include Monte Carlo simulations in the analysis.

IMO, for "yes, buy/no, don't buy" decisions, the more "accurate" analyses are not better than the "back of the envelope" calculations. They most likely return the same answer. (They are fun to do, though - unless they don't return the answer you wanted.)

In the end, almost no one uses DVC the way they planned, anyway, which makes all those calculations pretty much moot. Once a member, they go more often, stay longer, upgrade themselves to larger accomodations and/or treat friends and family. Doubt anyone included those factors in their calculations!

JMHO. YMMV.

 

[dsnydaddy]

I did a lot of calculations in my two year decision to buy vs not to buy. And if I just plugged in the cost of a hotel room vs buying into DVC then it was not a good decision for me. If, however, I started looking at needing more room that an hotel room provides, DVC starts making a lot more sense. I went from a break-even prospect to actually seeing that I could save some money. Besides, I was spending the money anyway. Both in an RV that we rarely used (started vacationing at resorts more than RV Parks) and in the hotel costs at WDW. It made good sense to put that money into something that we would enjoy and give us the comfort that we were starting to need on vacations. So, emotional... Yes! But we are not doing too badly financially for the decision either.

 

[supersnoop]

Almost every financial analysis I've seen ignores the asset value of the contract. Perhaps that's because most timeshares are liabilities, but DVC is different. I evaluate the value as if it were an inflation adjusted annuity. It will have a positive redemption value until the day it expires.

 

[pangyal]

Almost every financial analysis I've seen ignores the asset value of the contract. Perhaps that's because most timeshares are liabilities, but DVC is different. I evaluate the value as if it were an inflation adjusted annuity. It will have a positive redemption value until the day it expires.

Thank you for writing this so succinctly, I was actually just working on a way to word this in such a way . I completely agree with this.

 

[dsnydaddy]

Almost every financial analysis I've seen ignores the asset value of the contract. Perhaps that's because most timeshares are liabilities, but DVC is different. I evaluate the value as if it were an inflation adjusted annuity. It will have a positive redemption value until the day it expires.

Very true. I don't usually add in the asset value of this because I plan on keeping it and passing it on to my kids. However, that doesn't negate it's value. If at sometime things change or the kids aren't interested (like that'll happen) then I'll be able to sell it and get some portion of my investment back.

 

[DVCnewB]

We've been going to WDW every year since 2001; mostly staying at the value resorts (POP Century is our favorite value) but a couple of moderate ones too. Every year we would look at the cost of DVC and it never made sense. Then last year we stayed at the Boardwalk (rented points) and there was no going back to anything less. Once you know you'll always be staying at a deluxe resort every year you can see the advantage of DVC. That being said, we plan on selling in 15 years to recover our initial (resale) investment. We did get more points than needed to rent out hopefully offsetting the dues. Even if we don't get the dues covered it's still less expensive then renting points which in turns is less expensive then paying rack rates. DVC has us looking outside WDW too; like Aulani, Hilton Head and Grand Californian for Disneyland. DVC does change the way you think about vacations. Hmm... we may need to rethink that reselling part of the equation.

 

[DougEMG]

Disclaimer - I'm an IT guy, not a financial guy, but I do love spreadsheets.

I bought DVC purely as a way to make going to WDW more affordable. We bought our first contract in 2010, more in 2011 & 2012 and our last one in 2014; all were resale. Prior to owning DVC we (2A+1C) would stay in a moderate, usually with free dining. For every single contract I looked at how long the pay back period was for me to break even, comparing it to what we were doing and comparing it to renting points. My comfort zone was a 7-8 year breakeven time period.

Based on my calculation, in 2016 I will hit my breakeven point.

If resale prices ever drop back down to what they were like in 2011-2012 I'll buy more points. At todays prices, they are more than I care to spend.

 

[DVCanadian]

I've added on 32 times and never did a financial analysis for any of those purchases.

I find this to be the most amazing part of this thread. That has got to be the most add-ons!!!

Would you be comfortable disclosing your total points? I'm trying to imagine if you did 32 twenty-five point add-ons or if you own 2000 points or if you also sell a lot of contracts. Mind blowing.

 

[DVC Mike]

I'm trying to imagine if you did 32 twenty-five point add-ons or if you own 2000 points or if you also sell a lot of contracts.

I sold a bunch as well. I have 13 contracts right now.

 

[DougEMG]

I find this to be the most amazing part of this thread. That has got to be the most add-ons!!!

Would you be comfortable disclosing your total points? I'm trying to imagine if you did 32 twenty-five point add-ons or if you own 2000 points or if you also sell a lot of contracts. Mind blowing.

There is a thread called the 1000 point club were some members have said how many points they own.

 

[mrsmith9]

Disclaimer - I'm an IT guy, not a financial guy, but I do love spreadsheets.

I bought DVC purely as a way to make going to WDW more affordable. We bought our first contract in 2010, more in 2011 & 2012 and our last one in 2014; all were resale. Prior to owning DVC we (2A+1C) would stay in a moderate, usually with free dining. For every single contract I looked at how long the pay back period was for me to break even, comparing it to what we were doing and comparing it to renting points. My comfort zone was a 7-8 year breakeven time period.

Based on my calculation, in 2016 I will hit my breakeven point.

If resale prices ever drop back down to what they were like in 2011-2012 I'll buy more points. At todays prices, they are more than I care to spend.

I also purchased my first contract in 2010. I have a spreadsheet that tracks every night we have stayed on points. I also track the lowest cost Value room, the lowest cost Moderate room, the lowest cost Deluxe room, the lowest cost Villa room, and the cash rate for the villa we actually book. The lowest price rooms are often calculated with a Florida Resident or Annual Pass discount. Since we only stay in studios it is a relatively easy comparison.

• Comparing our DVC Studio stays to a Value resort we will never break even.
• Comparing our DVC Studio stays to a Moderate resort we might break even in 2025 (16 years after first purchase)
• Comparing our DVC Studio stays to a Deluxe resort we might break even in 2017 (8 years after first purchase)
• Comparing our DVC Studio stays to the cheapest DVC Studio resort we might break even in 2018 (9 years after first purchase)
• Comparing our DVC Studio stays to the cash rate for the same accommodation we will break even after our next trip in November (6 years after first purchase)

The first 4 comparisons aren't necessary fair. Comparing a DVC studio to the cheapest room elsewhere. Even comparing a studio at VGF, Poly, etc. to the cheapest Deluxe or cheapest villa (i.e. OKW) isn't fair.

 

[DougEMG]

I also purchased my first contract in 2010. I have a spreadsheet that tracks every night we have stayed on points. I also track the lowest cost Value room, the lowest cost Moderate room, the lowest cost Deluxe room, the lowest cost Villa room, and the cash rate for the villa we actually book. The lowest price rooms are often calculated with a Florida Resident or Annual Pass discount. Since we only stay in studios it is a relatively easy comparison.

• Comparing our DVC Studio stays to a Value resort we will never break even.
• Comparing our DVC Studio stays to a Moderate resort we might break even in 2025 (16 years after first purchase)
• Comparing our DVC Studio stays to a Deluxe resort we might break even in 2017 (8 years after first purchase)
• Comparing our DVC Studio stays to the cheapest DVC Studio resort we might break even in 2018 (9 years after first purchase)
• Comparing our DVC Studio stays to the cash rate for the same accommodation we will break even after our next trip in November (6 years after first purchase)

The first 4 comparisons aren't necessary fair. Comparing a DVC studio to the cheapest room elsewhere. Even comparing a studio at VGF, Poly, etc. to the cheapest Deluxe or cheapest villa (i.e. OKW) isn't fair.

Nice comparison.

Just curious though if you bought resale or direct.

 

[Sparrow624]

We started doing financial analysis years ago and decided not to buy because of it. We got busy, vacationed less, and spent less time as a family.

We are frugal.

We threw out the financial analysis and bought into DVC to FORCE us to take a yearly vacation as a family for at least a week. So glad we did.

 

[dsnydaddy]

We started doing financial analysis years ago and decided not to buy because of it. We got busy, vacationed less, and spent less time as a family.

We are frugal.

We threw out the financial analysis and bought into DVC to FORCE us to take a yearly vacation as a family for at least a week. So glad we did.

I've heard this a number of times too. A friend of mine bought 250 pts at the VGC when it first opened. I thought he was insane! But truth be told he was a work-a-holic and the investment forced him to slow down and take time with his family. He's a smart guy and knew that it probably wouldn't pay in the long run. Turns out he was wrong. VGC turned out to be a very good investment as it is worth about $50-60 more per point than he bought it for.

 

[Popouri DVC]

I've heard this a number of times too. A friend of mine bought 250 pts at the VGC when it first opened. I thought he was insane! But truth be told he was a work-a-holic and the investment forced him to slow down and take time with his family. He's a smart guy and knew that it probably wouldn't pay in the long run. Turns out he was wrong. VGC turned out to be a very good investment as it is worth about $50-60 more per point than he bought it for.

Nice.

Betcha VGF will be too in the not-too-distant future...

 

[Joshuy]

This is a great post. I love it, the links and the quote from the guy at mousesavers. For me, the decision to buy into DVC had to do with 1. I like staying at nice places and 2. If I can save some money, why not? I'm going to spend the money anyway (love disney).

The reason I did my analysis here (which has been pointed out nicely, is quite inadequate for calculating savings over time) is so I could get a SENSE of the relative costs of each property because I knew initial cost/pt didn't feel right. I just wanted to get a better feel than disney was giving me. I wanted a feel of relative cost for each property but not DVC vs investing/savings over time.

In any case, I appreciate the thoroughness of the post very much.

 

[mrsmith9]

Nice comparison.

Just curious though if you bought resale or direct.

resale...