Formula to figure out true cost per point

[hlhlaw07]

I saw a formula to calculate what the true cost per point is over the life of the contract and i cannot find it again. Can someone please post it here? Thanks!

 

[supersnoop]

It’s aback-of-a-napkin approach, but I use:

(Cost per point / year’s remaining) + current dues = annualized value per point

People will debate the time value of money and opportunity cost, but I think that simple little calculation does a pretty good job of accommodating for those variables.

 

[hlhlaw07]

Thanks! That’s pretty much what I was doing, just wanted to make sure that I wasn’t leaving something out.

 

[_auroraborealis_]

Be sure to account for cost of money, if you finance.

 

[Ben E N]

Also know that yearly dues are not fixed and can change significantly compared to other resorts over the life of a contract. Price per year is an important thing to consider, but in my mind home resort priority at a place you want to stay far outweighs it.

 

[skippytx]

I just took the total number of points left on the contract and divided by purchase price to get my base acquisition cost for each point. Then each year you can add your annual dues figure to get that years cost of each point.

I bought a 160 BLT with 43 years of points left @ 125 a pt, so a total of 6880 points. 20,000/6880 points ~ 2.91 base cost per point. Add your annual dues and there's your number. In 20 years when dues have tripled from 5.62/pt to 16.86/pt a year, it'll still be easy to figure out that year each point cost 19.78 that year.

It's pretty basic and leaves a lot of variables that the more finance inclined would include, but works for me.

 

[MrInfinity]

If someone offered you $40,000 now or $1,000/year for 40 years which would you take? This is obvious, right? You don't simply divide your cost by the # of years and say "it's like paying 1/40th of that per year for 40 years". $40,000, at even 5% interest is worth around 6x that over 40 years! The up front cost is a tiny fraction of your actual cost. For example if you have 40 years on your deal, $40k might be $1,000 per year for the capitol. True. But you have to add in 5%-10% interest. Where you pick in that range depends on you, but I use a medium 7%. Which means your cost is not $1,000 per year, it's your maintenance fees, plus $1,000 per year capital plus $2,800 interest. The interest is around 3X as important as the capital yet everyone overlooks this. That's why Disney sells these things. Getting your $40k now is so much more valuable than getting say $5k per year from you for vacations.

A simple formula accounting for time might be:
CPY = M*P + C/Y + I
CPY: Cost Per Year
M: Maintenance & Taxes
P: # of Points
C: Capital
Y: Years
I: Interest

Interest will be broken down further: I = C*R

Where we consider R, your interest, somewhere around 0.1 if you're financing, 0.05 if you're not, or more likely somewhere in between.

In total,
CPY = M*P + C/Y + C*R

A BLT example:
200pts @ $120pp
M = 5.6
P = 200
C = 24,000
Y = 42
R = .07

CPY will be 5.6*200 + 24,000/42 + 24,000*0.07
Which is 1,120 + 571 + 1,680
In total, $3,371 per year. Or /200, $16.8 per point per year.

If you ignore the time value of money you will understate your real costs by almost half, depending on the value you pick for R.

There are other factors like if you would deduct a part of M off your income, loaded points, and closing costs, but these are small and don't change much.

 

[Ben E N]

If someone offered you $40,000 now or $1,000/year for 40 years which would you take? This is obvious, right? You don't simply divide your cost by the # of years and say "it's like paying 1/40th of that per year for 40 years". $40,000, at even 5% interest is worth around 6x that over 40 years! The up front cost is a tiny fraction of your actual cost. For example if you have 40 years on your deal, $40k might be $1,000 per year for the capitol. True. But you have to add in 5%-10% interest. Where you pick in that range depends on you, but I use a medium 7%. Which means your cost is not $1,000 per year, it's your maintenance fees, plus $1,000 per year capital plus $2,800 per year interest. The interest is around 3X as important as the capital yet everyone overlooks this. That's why Disney sells these things. Getting your $40k now is so much more valuable than getting say $5k per year from you for vacations.

A more accurate formula might be:
CPY = M*P + C/Y + I
CPY: Cost Per Year
M: Maintenance & Taxes
P: # of Points
C: Capital
Y: Years
I: Interest

Interest will be broken down further: I = C*R

Where we consider R, your interest, somewhere around 0.1 if you're financing, 0.05 if you're not, or more likely somewhere in between.

In total,
CPY = M*P + C/Y + C*R

An example:
200pts @ $120pp
M = 5.6
P = 200
C = 24,000
Y = 42
R = .07

CPY will be 5.6*200 + 24,000/42 + 24,000*0.07
Which is 1,120 + 571 + 1,680
In total, $3,371 per year. Or /200, $16.8 per point per year.

If you ignore the time value of money you will understate your real costs by almost half, depending on the value you pick for R.

There are other tiny factors like if you would deduct a part of M off your income, how valuable this is to you, and other things like loaded points, closing costs, but these are one-time and small, so they don't change much.

I absolutely agree with you more than not, but it is also worth noting that there are more moving parts involved in this than just the time value of your money. There is also resale value (something I do not agree with taking into consideration, as it is too volatile) as well as the rising cost per night at comparative deluxe resorts.

People who bought into OKW are paying a yearly rate of $6.83 per point ($5.83 fees + $1 per year buy in cost). This rate can get them into a room at the Polynesian for under $110 per night in today's dollars. There is no other way to get that sort of rate.
Yes, they could have invested their money in 1992 and had enough to not worry about paying any price off the rack, but these same people have also taken 25 years worth of vacations as well.

I think the vast amount of variables involved in buying into DVC is why people just choose to use a simple calculator, realizing that the math is not going to be perfect by any means, but is at least consistent. It is also why people say it is so important to consider where you would be most happy staying as your number one priority.

 

[hlhlaw07]

I absolutely agree with you more than not, but it is also worth noting that there are more moving parts involved in this than just the time value of your money. There is also resale value (something I do not agree with taking into consideration, as it is too volatile) as well as the rising cost per night at comparative deluxe resorts.

People who bought into OKW are paying a yearly rate of $6.83 per point ($5.83 fees + $1 per year buy in cost). This rate can get them into a room at the Polynesian for under $110 per night in today's dollars. There is no other way to get that sort of rate.
Yes, they could have invested their money in 1992 and had enough to not worry about paying any price off the rack, but these same people have also taken 25 years worth of vacations as well.

I think the vast amount of variables involved in buying into DVC is why people just choose to use a simple calculator, realizing that the math is not going to be perfect by any means, but is at least consistent. It is also why people say it is so important to consider where you would be most happy staying as your number one priority.

I completely agree. I’m contemplating buying a resale contract because the way my family travels, it seems like it makes sense to buy DVC, and i fully understand the time value of money and all that. I have paid rack rate at thanksgiving for a 2BR at OKW, i have used a room only discount for a 1BR at CCV, I have paid a military rate for a 2BR at OKW (which was actually cheaper than renting points), and I have rented points for a 2BR at CCV. By my simple calculations, DVC, while more money up front, seems like in the long run is the better choice than how we have been doing disney. And it also comes with the fact that a Disney vacation is more likely as we are already paying for it. The money invested today doesn’t come with guarantee.

 

[MrInfinity]

I completely agree. I’m contemplating buying a resale contract because the way my family travels, it seems like it makes sense to buy DVC, and i fully understand the time value of money and all that. By my simple calculations, DVC, while more money up front, seems like in the long run is the better choice than how we have been doing Disney. And it also comes with the fact that a Disney vacation is more likely as we are already paying for it. The money invested today doesn’t come with guarantee.

Sure, that's pretty much why we bought in too. We wanted to own a little spot next to the MK that we can go back to for a long time. And access to the 2B's, cuz 2B's on the hotel side are really expensive.
But still people often recommend the simple formula of...
CPY = M*P + C/Y
Which completely ignores the largest of the 3 components. All one has to do is consider the slightly more complicated (but still pretty simple) formula of...
CPY = M*P + C/Y + C*R
Which will at least point a reader toward a more realistic view.
Who wants a simple formula that gives results that are off by half? I wouldn't want a formula that tells me my cost is $8.5/point if the cost is really more like $16.8/point.

 

[supersnoop]

The problem with including the time value of money is that it’s kind of already built in. You’re purchasing future lodging at today’s prices. And the dues will continue to rise. Hence, the simple calculation is the future value of the points in today’s dollars.

If you include the time value of money in the initial calculation, then you need to figure the future value of staying at a Disney resort and the annual increase in dues.

I like to go to the milk analogy. If milk costs $4/gallon, would you pay $40 now for one gallon of milk for the next 40 years? Do you expect the price of milk to increase more than you’d earn if you invested the money? If the rate of increase is the same, then it’s a wash. Which is why the simple calculation works well.

 

[MrInfinity]

The problem with including the time value of money is that it’s kind of already built in. You’re purchasing future lodging at today’s prices. And the dues will continue to rise. Hence, the simple calculation is the future value of the points in today’s dollars.

If you include the time value of money in the initial calculation, then you need to figure the future value of staying at a Disney resort and the annual increase in dues.

But also the dues will rise. So whether you're staying hotel side and paying ever increasing rates or staying DVC side and paying ever increasing dues that part is a wash. What remains in both cases, is that if you have $40,000 now, that is worth a lot. Whether it is 4% that you'd earn if you pay down your mortgage or 6% if you'd pay off a car or 15% if you'd pay off a credit card, that is actual money that you'd earn / save. At 7% of $40,000, that's $2800/year. That means you could vacation in Disney World for $2800/year and never touch your principle!

On my spreadsheet I factor in these nuances. I can tweak how fast I think hotel rates will rise and separately how fast I think DVC dues will rise. But the OP was going for simple. In all cases, the interest on your money is the biggest cost in buying DVC. For example. To buy DVC we sold stock. I'm now DEFINITELY not earning some real money. We're not talking vacations being more expensive... But on top of the money it cost me to buy DVC right now, it ALSO cost me the next 40 years worth of having that income which will far dwarf the value of the capital itself by about 6X over the course of 40 yrs.

 

[4luv2cdisney]

That's the issue.....every situation is different. If you were realistically earning 7% on that money then you would have been better off financing with a personal loan for 4%, yet people will say "don't finance".

We had budgeted $10K for our 2018 and 2019 vacations (room, tix, food). Instead we spent 10K on DVC. However, we will still have dues, AP's, and food to pay for. I'm going to cut about $1K out of our Christmas budget, earned a couple hundred in rewards and a gc on the purchase, and I'm probably going to put us on a bit of a budget with things like coffee stops and eating out, etc. for the next 7 months (the amount of time I have the purchase at 0% interest on my Disney Visa) so I can reduce how much cash actually comes out of my vacation savings account.

Realistically, I'm probably only going to spend about $3K more in cash over 3 years doing it this way. I assure you, that money was not being invested at a return of 7%. For someone like me, there's no point in anything other than the "simple" calculation.

Actually, my future trips would be budgeted at about $5K+ the increase in costs of room, tix and food but will now be budgeted at about $3K+ increase in costs of dues, tix and food. If the hotel prices were to rise at the same % as the dues, a couple of percent on $400 (dues) vs a couple percent on $2500 (hotel room) means I'm coming out ahead every single year plus I'm freeing up a couple grand per trip in the future. I can invest that money if I choose. Although, I might just use it to buy more points

 

[crisi]

The time value of money/rate of inflation question is why I like to say that figuring out the cost per point is a fun intellectual exercise, but the real questions are "can you afford it" and "are you getting value for your money." Because I can set R to whatever I want - in the late 1990s we all though R was at least 12% - and I saw people use 18%. And I can set inflation to whatever I want - in the mid 1970s we could set that at 12% - I can find historical precedent for some really weird numbers and make a case. And therefore, I can get whatever answer I want. And then I can compare my cost per DVC room to the most unlikely scenarios - like paying rack rate for the same DVC room, or booking suites, or staying offsite at the KOA campground in a tent. And get an even "better" answer. And continue to bake my numbers until they are simply fluff and it either looks like DVC is the stupidest choice to make, or you'd have to be stupid not to. A single percentage point one way or another can make a big difference in these sorts of calculations.

And then you still end up with an incomplete model. What about risk? What about inflation on other components of a Disney vacation? What about the opportunity cost of both vacation time and money?

Does DVC work for you? Can you afford it? Do you get value out of it for the money you put in? If the answers are yes, yes and yes, look at cost per point as something you can waste your time figuring out that has no real value. Fun for finance geeks - dangerous for any one else.

 

[crisi]

That's the issue.....every situation is different. If you were realistically earning 7% on that money then you would have been better off financing with a personal loan for 4%, yet people will say "don't finance".

I do just that - not with DVC, but with my house. It was paid off, we remortgaged it and invested the money. Since I did that, I've gotten far better than 7% returns on the stock market (its invested in dividend stocks that paid at least the 4% mortgage interest rate when I invested in them, so unless someone cuts dividends, its hard to loose). I get the tax break on the mortgage interest, and come out a few thousand ahead every year for doing nothing but accepting some risk I can afford to take. But the house is a permanent asset on which the mortgage is only about a third of its value - so my risk is low. There are a lot of assets not tied up in this - this isn't my retirement or my kid's college.

 

[DVC Doctor]

A BLT example: 200pts @ $120pp
M = 5.6, P = 200, C = 24,000, Y = 42, R = .07

CPY will be 5.6*200 + 24,000/42 + 24,000*0.07
Which is 1,120 + 571 + 1,680
In total, $3,371 per year. Or /200, $16.8 per point per year.

There are many other ways to perform a financial analysis on this, and you listed one of them.

My question to you is - if you are buying at $16.8pp, wouldn't you be better off renting points from a member to save money. Or you should buy a 25 point resale and transfer in points as you need them.

I personally think 7% interest over 40 years is very high, but that is my opinion.

Also, most people will not keep their contracts for 40-50 years so this is more akin to a intermediate length investment. There are situations where someone bought BLT for $100 from Disney during the first two years and will keep it for 10-20 years and then sell it for a profit.

 

[Ben E N]

There are many other ways to perform a financial analysis on this, and you listed one of them.

My question to you is - if you are buying at $16.8pp, wouldn't you be better off renting points from a member to save money. Or you should buy a 25 point resale and transfer in points as you need them.

I personally think 7% interest over 40 years is very high, but that is my opinion.

Also, most people will not keep their contracts for 40-50 years so this is more akin to a intermediate length investment. There are situations where someone bought BLT for $100 from Disney during the first two years and will keep it for 10-20 years and then sell it for a profit.

Rentals are very fluid, so if you know you are going to be going to Disney World for many years, you are better off buying. If you assume BLT points are about $17/pt/yr then you will come out ahead vs renting within 3-4 years, once those points most likely go for $18-20.

 

[DVC Doctor]

Rentals are very fluid, so if you know you are going to be going to Disney World for many years, you are better off buying. If you assume BLT points are about $17/pt/yr then you will come out ahead vs renting within 3-4 years, once those points most likely go for $18-20.

I can only wish BLT rentals would go to $18-20pp in 3-4 years, but I am not going to hold my breath (spec rentals do not count)

 

[crisi]

There are many other ways to perform a financial analysis on this, and you listed one of them.

My question to you is - if you are buying at $16.8pp, wouldn't you be better off renting points from a member to save money. Or you should buy a 25 point resale and transfer in points as you need them.

I personally think 7% interest over 40 years is very high, but that is my opinion.

Also, most people will not keep their contracts for 40-50 years so this is more akin to a intermediate length investment. There are situations where someone bought BLT for $100 from Disney during the first two years and will keep it for 10-20 years and then sell it for a profit.

Frankly, the question on renting points isn't about saving money - the renting points question is a matter of risk and value. Owning carries some financial risk, renting carries some risks as well. Owning provides certain types of value - the ability to control your own points. Renting provides different kinds of value - home resort booking windows if you can find an owner.

If you have to save money over renting points for DVC to work for you, you can't afford DVC. If you need the numbers to work for you in any way, you can't afford DVC. Dean will say that you shouldn't buy if it doesn't make financial sense, and there is truth in that - but you also should be very wary of purchasing because of the way the numbers work. Its easy to make them lie.

 

[DVC Doctor]

Frankly, the question on renting points isn't about saving money - the renting points question is a matter of risk and value. Owning carries some financial risk, renting carries some risks as well. Owning provides certain types of value - the ability to control your own points. Renting provides different kinds of value - home resort booking windows if you can find an owner.

If you have to save money over renting points for DVC to work for you, you can't afford DVC. If you need the numbers to work for you in any way, you can't afford DVC. Dean will say that you shouldn't buy if it doesn't make financial sense, and there is truth in that - but you also should be very wary of purchasing because of the way the numbers work. Its easy to make them lie.

"MrInfinity" posted an BLT example: 200pts @ $120pp = $16.80pp cost

The problem I have is the addition of $1,680 in interest fees per year. I fully understand how this is calculated (but disagree with using 7%) and if you strip the interest out, the cost of BLT in that example is more like $8.46pp

This is NOT making numbers LIE, it is about how to determine the true cost of a DVC membership and it is obvious that different people use different methods.

I personally allocate very little to the interest rate, unless you are financing it with a loan (can be up to 14%), as my discretionary money in the bank is making less than 1%

There are tons of ways to determine the cost of points and I personally think the simple method is the best as there are so many unknown variables. Ultimately buying DVC is about pre-paid or discounted vacations and it is not an investment, but I understand the different ways to measure an investment, but not sure timeshares should be as rigid or detailed, unless you are buying DVC to rent points as a business and not for personal use.