DVC Landlord - can this business really work?

[silmarg]

Seems like the price of resales are quite attractive of late (in the $60s for OKW). Was wondering if the average rental is $10pp and maint at $5pp... that one could recoup the full cost of the DVC in 12 years (of course this is not including assumptions for inflation, time value of money or financing - if needed).

To me this sounds like a pretty good payback.

What am I missing?

Are there folks the are serial renters out there? Are there any additional costs that I am missing?

Poke some holes in my analysis...

 

[CarolA]

I wish you luck

People mention this every now and then but I rarely see anyone say it's as easy as it sounds. Renting is a LOT of work. Most "Landlords" seem to spend a lot of time checking reservations etc for folks who either (A) change thier mind or (B) expect the impossible (i.e., Christmas day NOW with a BW view LOL!)

Plus OKW is probably one the "least" popular rentals. The "glamourous" resorts are the one's people want (BC, BW, VWL, BLT)

The other problem is while I see a lot of "for sale" at 60 I don't see a lot of ROFR posts saying it cleared so.. getting it at that price might not be easy.

you are missing the tax liablity too. At the point you become a "serial" renter it's taxable income!

Payback seems low and slow to me. Assuming the market recovers at the end of 12 years you would own a DEPRECIATED asset. (Seriously as OKW gets CLOSER to the end don't expect the price to rise!At some point I expect Disney to just let the bottom drop) So if the asset has depreciated the truth is you lost money.

 

[CarolAnnC]

This is not allowed per DVC. Rentals have been slow anyway lately with the economy, with some folks dropping their rental prices.

 

[Crystal_27]

I do think that there are a lot of "serial renters" out there who prefer (for various reasons or otherwise) to simply rent points and not buy into DVC. Their reasons are probably all over the board, but from a simple financial standpoint, it does seem like at some point, owning makes a lot more sense than renting. However, for those who rent, I would have to believe that they've also done the math and, for them, it continues to make more sense to rent. I guess that's good for us owners because that means that the rental market will (hopefully) remain strong.

 

[WolfpackFan]

Poke some holes in my analysis...

Easy, it's against DVC rules.

 

[wildernessDad]

If DVC found out that you were a professional renter, then can cancel your reservations. Then you'd be out of a lot of money unless you could justify going on a lot of vacations.

 

[silmarg]

Easy, it's against DVC rules.

ah... thats a pretty big hole... what does the DVC rules actually say? No serial renting? Or no renting at all?

As I will likely buy resale at some point... and this could put a wrinkle in the number of points I would buy.

 

[silmarg]

you are missing the tax liablity too. At the point you become a "serial" renter it's taxable income!

If you rent, then you could depreciate the purchase price and deduct the maintenance... so taxable income should not be that high...

 

[Doctor P]

If you rent, then you could depreciate the purchase price and deduct the maintenance... so taxable income should not be that high...

Not so quick. There are special rules related to timeshares and even non timeshare properties are not quite as easy to qualify for deductions as most people think.

 

[Sandisw]

I believe that DVC considers reservations of around 20 per year in other's name as a "red flag" that someone is renting as a business.

 

[CarolMN]

The purchase documents expressly allow renting, but they also prohibit "commercial renting". Commercial renting is not defined in the documents.

As others have posted, DVC recently decided that more than 20 reservations in a year gets you increased scrutiny as a possible commercial renter.

Other considerations:

Keep in mind that you would be competing directly with Disney. I suspect it isn't all that easy to rent at $10 when Disney is offering heavy discounts (such as the Buy 4/Get 3 free) or free dining promotions.

Another risk relates to the behavior of the people who rent from you - for example, you would be responsible if they damage the unit.

I'm sure there are others.

 

[JimMIA]

The purchase documents expressly allow renting, but they also prohibit "commercial renting". Commercial renting is not defined in the documents.

As others have posted, DVC recently decided that more than 20 reservations in a year gets you increased scrutiny as a possible commercial renter.

And, of course, 20 is an entirely arbitrary number. Next year they could decide that 15 is the number, or 4. The number is whatever they make it, and if they say you're a commercial renter, life will be hard.

That's the problem with the "DVC Landlord" concept. It's a business model entirely dependent on the benevolence of your direct competitor.

 

[DisneyWalker44]

you are missing the tax liablity too. At the point you become a "serial" renter it's taxable income!

All income is taxable - regardless of whether this is your first or 100th time renting. You are also responsible for collecting and paying sales and resort taxes on anything you collect for renting. I suspect 99% of folks don't pay the taxes. You have to decide if you are comfortable committing fraud, or plan to find a way to file and pay all the taxes.

While Disney has said they have the right to stop commercial renting, I don't believe there has ever been a single instance where they have done so. And there are a number of people who are pretty blatant about commercial renting. Personally, I wouldn't worry about it.

What I would worry about (in addition to the tax issue) is whether this makes good business sense. When you add up all the cost of owing points - including maintenance fees, cost of capital, financing, closing costs, etc. I don't see any way to figure points cost less than $9/year. If you look on the trade boards, you'll see that's all some folks are asking for their point. I'm sure if you put work into it, you can get $10 a point; and if you work hard at it, $12-13 isn't unreasonable. But who wants to work hard for $3-4 a point? And even if you put in the work, there's no guarantees. All you need is for one deal to go bad, one client to cheat or sue you, and all your profits will be down the drain.

Gotta be a better way to make a living.

 

[jade1]

 

[Cmbar]

Also, any of the boards such as DIS can, if prompted by Disney or some other law (like Florida Timeshare or something like that) could shut down the rent/trade boards. Other than renting to friends or family it would be difficult to get renters.

To the tax question. If we rent to family in the sense that we buy their accomodations and they buy our tickets, thats not really renting right? My family will not let us take them "free". They insist on buying tickets for us or meal plan or something of that nature. I figure that is just a generous gift vs. renting. Right??

 

[CarolA]

And don't forget the poster who recently found her account frozen because her "renters" had left Disney with an unpaid bill! OPPS!

 

[Dean]

This is not allowed per DVC. Rentals have been slow anyway lately with the economy, with some folks dropping their rental prices.

It would depend on the scope and numbers involved. We can't make a blanket statement it's not allowed but in the extreme it would not be.

Not so quick. There are special rules related to timeshares and even non timeshare properties are not quite as easy to qualify for deductions as most people think.

It is complicated, we were just discussing this on a thread a couple of days ago HERE. It would be possible but unlikely to not have to claim the rental income as per the vacation home rules. Someone who bought specifically or mostly to rent could easily depreciate, claim closing costs, interest, phone calls, listing fees, dedicated computer programs to track points if paid for including excel, paypal fees, redweeks and TUG membership, even Timesharing today membership. Everyone can claim RE taxes if they itemize. Depreciation would lower the cost basis creating a possible higher capital gain if one sold later.

And, of course, 20 is an entirely arbitrary number. Next year they could decide that 15 is the number, or 4. The number is whatever they make it, and if they say you're a commercial renter, life will be hard.

That's the problem with the "DVC Landlord" concept. It's a business model entirely dependent on the benevolence of your direct competitor.

While 20 is arbitrary, the fact that the legal paperwork including the POS specifically allow renting and that that a definition of "commercial" was omitted would require that DVC have a definition that would stand up in court. IMO, that requires something that essentially everyone, including those that rent, could agree is commercial. So while they could vary from 20, it's unlikely it could go much below that. Then you get into what's 20. Is a change of room types or resorts one or 3, etc.

IMO, buying DVC mainly to rent is a fools approach. Far too much risk and too little reward to make it worthwhile to buy with that idea in mind. Now if you get other benefits like home resort priority, it might be worth the risk and hassle but generally not and certainly not from simply a rental income standpoint. Assuming 12% before taxes in a good mutual fund (likely a lowball figure for current investments), DVC can't touch that. Buying today, about the best you could look at would be 6-8% before taxes assuming you didn't finance.

 

[crisi]

I would get your tax advice from your CPA before starting this. Its been a while since tax class, but I recall that there are some specific rulings regarding timeshares as a business - the IRS isn't interest in subsidizing your vacations and has set up rules to make sure they aren't. You might be able to write off far less than you imagine.

But before I'd pay a CPA, I'd think carefully about your margins and the risks involved. If someone backs out on paying for their reservation 45 days out - towards the end of your use year - you may find yourself holding points that can't be used or a reservation that can't be rerented - with a check for whatever you asked for up front. Also, for the margin that is there, is it going to be worth the hassle? Some DVC owners who rent LOVE doing it - and are willing to help make wonderful vacations for people for very little profit. Other owners find the whole process rather cumbersome and only worth the time when they will otherwise be out the points.

 

[CarolAnnC]

It would depend on the scope and numbers involved. We can't make a blanket statement it's not allowed but in the extreme it would not be.

The OP was stating he was purchasing DVC with the express intent of renting in order to recoup the full cost of the DVC in 12 years. My statement that DVC does not allow this still stands.

 

[Dean]

The OP was stating he was purchasing DVC with the express intent of renting in order to recoup the full cost of the DVC in 12 years. My statement that DVC does not allow this still stands.

And I would disagree somewhat. Currently and likely into the future, a normal size contract used in this way would not violate the rules as in place. I could see the argument that it was bought specifically and only to rent out as commercial but as of yet that would not be the case with DVC. Still, it would be stupid choice but there's no rule against stupid.