How Long To Recoup Your Initial DVC Cost?

[Galun]

Just for interest sake, I ran a fairly basic example through a spreadsheet to see how owing DVC and renting out points compared to a investment.

Here's my assumption that I used.

Point Bought = 100
$/Point = $60/point
Initial DVC Purchase Costs = $6,000
Initial Investment Amount = $6,000
MF = $4.80 (assume using SSR)
Annual MF Increase 3.5%
Tax Rate = 30% (this is on both the rental income and investment income)
Investment Return = 6% (I used this as it is my actual return on my investments since 1999)
Rental Rate = $11/point and increase by $1 every 4-5 years based on MF

I then ran these number for 10 years and 20 years and the results were.

Investing 10 years:
Total after tax earning = $3,054
Initial Investment = $6,000
Total Value after 10 years = $9,054

Renting after 10 years:
Total Rental Income after MF = $4,248
Value of DVC = ?
Total Value after 10 years = $4,248 + DVC resale value

For them to come out equal, the DVC needs to be worth $4,805 or 80% of it's original purchase prices after paying for realtors commisson.


Investing 20 years:
Total after tax earning = $7,662
Initial Investment = $6,000
Total Value after 10 years = $13,662

Renting after 20 years:
Total Rental Income after MF = $8,488
Value of DVC = ?
Total Value after 10 years = $8,488 + DVC resale value

For them to come out equal, the DVC needs to be worth $5,174 or 86% of it's original purchase prices after paying for realtors commisson.


Given the assumptions, it certainly looks like renting DVC points is not a good investment.

Playing around with the numbers can come up with all kinds of wonderful results.

For example, If on the other hand your investments only earn 2.5%, then after 10 years your DVC would only have to be worth 50% and after 20 years your DVC could be worth nothing.

On the other hand earning 6% and paying no taxes on either option, the DVC contract would have to be worth 78% after 10 years and 119% after 20 years.

For myself investing I'd rather just buy a nice dividend paying Canadian bank or dividend ETF.

I just purchased my first DVC contract, and stumbled upon this thread.

I actually view DVC as an investment first and vacation second. If one were to look at DVC purely as an investment, it's pretty simple. You pay $ per point up front cost, say $50. You collect a certain amount of income per point each year, say $11. You pay a certain amount of expense per point each year, say $4.81 at SSR. Your annual cash flow is $11 - $4.81 = $6.19. By 2054 your contract stop generating points and it is worth zero, so you have 40 years of the contract generating cash flow for you.

Think of it as a cash flow stream that you paid $50 up front, and it generates $6.19 per year for 40 years. PV = -50. PMT = 6.19. N = 40. FV = 0. Solve for rate in excel: =RATE(40,6.19,-50,0). You get 12.26%. That's is your internal rate of return. It definitely beats any long term stock market return, and in my opinion with lower risk. Additionally, this return merely assumes yearly cash flow stays at $6.19, which is unrealistic as it should go up with inflation. The IRR goes up to mid to high teens when you consider cash flow growth. Find me another asset class that can generate this kind of return.

Or, let's use Doug's assumption of a 6% stock market return.
1) Investment of $50 growing 6% a year to 1/2054 (assuming SSR): after 40 years, that investment is now worth $50 x (1.06^39) = $485.18
2) Buying SSR: $6.19 in year 1 growing at 3% (my assumption of inflation). The cumulative cash flow is reinvested with 6% return (stock market). Example: Year 1 cash flow = $6.19. Year 2 cumulative cash flow = $6.19 x 1.06 + $6.19 x 1.03 = $12.94. Year 3 cumulative cash flow = $12.94 x 1.06 + $6.19 x (1.03^2) = $20.28... etc. By 2054 your cumulative cash flow is $1449.72.

Now the assumptions are definitely garbage in garbage out, so take all this with a grain of salt. Many people seem fixated that it takes 5 / 8 / 10 years or whatever to break even, but they seem to forget that the contract generates points (and cash flow) for 40 years.

I see two major risks to this:
1) A common risk I see is that the maintenance fee goes up at a faster rate than rental fee, and your "spread" gets eroded. I think that is a theoretical risk but not realistic. The rental points comes from owners. Maintenance fee cannot sustainably grow faster than rental fee because at some point owners will not be willing to rent, drying up the pool of available rental points and thus push rental prices up. There may be fluctuations on the spread based on the economic cycle, but it should normalize over the life of the contract.
2) Disney changes the rule on you down the road that limits your ability to rent. I don't see how they can do this without destroying the resale market, and I think they prefer a vibrant resale market to sell their direct points. But if they make it more restrictive then those points aren't too bad for vacations either.

Anyways, just throwing a counter argument out there.

 

[DougEMG]

I just purchased my first DVC contract, and stumbled upon this thread.

I actually view DVC as an investment first and vacation second. If one were to look at DVC purely as an investment, it's pretty simple. You pay $ per point up front cost, say $50. You collect a certain amount of income per point each year, say $11. You pay a certain amount of expense per point each year, say $4.81 at SSR. Your annual cash flow is $11 - $4.81 = $6.19. By 2054 your contract stop generating points and it is worth zero, so you have 40 years of the contract generating cash flow for you.

Think of it as a cash flow stream that you paid $50 up front, and it generates $6.19 per year for 40 years. PV = -50. PMT = 6.19. N = 40. FV = 0. Solve for rate in excel: =RATE(40,6.19,-50,0). You get 12.26%. That's is your internal rate of return. It definitely beats any long term stock market return, and in my opinion with lower risk. Additionally, this return merely assumes yearly cash flow stays at $6.19, which is unrealistic as it should go up with inflation. The IRR goes up to mid to high teens when you consider cash flow growth. Find me another asset class that can generate this kind of return.

Or, let's use Doug's assumption of a 6% stock market return.
1) Investment of $50 growing 6% a year to 1/2054 (assuming SSR): after 40 years, that investment is now worth $50 x (1.06^39) = $485.18
2) Buying SSR: $6.19 in year 1 growing at 3% (my assumption of inflation). The cumulative cash flow is reinvested with 6% return (stock market). Example: Year 1 cash flow = $6.19. Year 2 cumulative cash flow = $6.19 x 1.06 + $6.19 x 1.03 = $12.94. Year 3 cumulative cash flow = $12.94 x 1.06 + $6.19 x (1.03^2) = $20.28... etc. By 2054 your cumulative cash flow is $1449.72.

Now the assumptions are definitely garbage in garbage out, so take all this with a grain of salt. Many people seem fixated that it takes 5 / 8 / 10 years or whatever to break even, but they seem to forget that the contract generates points (and cash flow) for 40 years.

I see two major risks to this:
1) A common risk I see is that the maintenance fee goes up at a faster rate than rental fee, and your "spread" gets eroded. I think that is a theoretical risk but not realistic. The rental points comes from owners. Maintenance fee cannot sustainably grow faster than rental fee because at some point owners will not be willing to rent, drying up the pool of available rental points and thus push rental prices up. There may be fluctuations on the spread based on the economic cycle, but it should normalize over the life of the contract.
2) Disney changes the rule on you down the road that limits your ability to rent. I don't see how they can do this without destroying the resale market, and I think they prefer a vibrant resale market to sell their direct points. But if they make it more restrictive then those points aren't too bad for vacations either.

Anyways, just throwing a counter argument out there.

Renting can definitely generate an attractive cash flow. It's just not risk free and I wouldn't want to be the one encouraging someone to do this and then have it blow up in their face.

 

[bighoo93]

I just purchased my first DVC contract, and stumbled upon this thread.

I actually view DVC as an investment first and vacation second. If one were to look at DVC purely as an investment, it's pretty simple. You pay $ per point up front cost, say $50. You collect a certain amount of income per point each year, say $11. You pay a certain amount of expense per point each year, say $4.81 at SSR. Your annual cash flow is $11 - $4.81 = $6.19. By 2054 your contract stop generating points and it is worth zero, so you have 40 years of the contract generating cash flow for you.

Think of it as a cash flow stream that you paid $50 up front, and it generates $6.19 per year for 40 years. PV = -50. PMT = 6.19. N = 40. FV = 0. Solve for rate in excel: =RATE(40,6.19,-50,0). You get 12.26%. That's is your internal rate of return. It definitely beats any long term stock market return, and in my opinion with lower risk. Additionally, this return merely assumes yearly cash flow stays at $6.19, which is unrealistic as it should go up with inflation. The IRR goes up to mid to high teens when you consider cash flow growth. Find me another asset class that can generate this kind of return.
.

Good post, but I wouldn't make the argument that the case gets better with inflation. Inflation is also making those out year dollars less valuable. By definition, this is a wash.

 

[ELMC]

I just purchased my first DVC contract, and stumbled upon this thread.

I actually view DVC as an investment first and vacation second. If one were to look at DVC purely as an investment, it's pretty simple. You pay $ per point up front cost, say $50. You collect a certain amount of income per point each year, say $11. You pay a certain amount of expense per point each year, say $4.81 at SSR. Your annual cash flow is $11 - $4.81 = $6.19. By 2054 your contract stop generating points and it is worth zero, so you have 40 years of the contract generating cash flow for you.

Think of it as a cash flow stream that you paid $50 up front, and it generates $6.19 per year for 40 years. PV = -50. PMT = 6.19. N = 40. FV = 0. Solve for rate in excel: =RATE(40,6.19,-50,0). You get 12.26%. That's is your internal rate of return. It definitely beats any long term stock market return, and in my opinion with lower risk. Additionally, this return merely assumes yearly cash flow stays at $6.19, which is unrealistic as it should go up with inflation. The IRR goes up to mid to high teens when you consider cash flow growth. Find me another asset class that can generate this kind of return.

Or, let's use Doug's assumption of a 6% stock market return.
1) Investment of $50 growing 6% a year to 1/2054 (assuming SSR): after 40 years, that investment is now worth $50 x (1.06^39) = $485.18
2) Buying SSR: $6.19 in year 1 growing at 3% (my assumption of inflation). The cumulative cash flow is reinvested with 6% return (stock market). Example: Year 1 cash flow = $6.19. Year 2 cumulative cash flow = $6.19 x 1.06 + $6.19 x 1.03 = $12.94. Year 3 cumulative cash flow = $12.94 x 1.06 + $6.19 x (1.03^2) = $20.28... etc. By 2054 your cumulative cash flow is $1449.72.

Now the assumptions are definitely garbage in garbage out, so take all this with a grain of salt. Many people seem fixated that it takes 5 / 8 / 10 years or whatever to break even, but they seem to forget that the contract generates points (and cash flow) for 40 years.

I see two major risks to this:
1) A common risk I see is that the maintenance fee goes up at a faster rate than rental fee, and your "spread" gets eroded. I think that is a theoretical risk but not realistic. The rental points comes from owners. Maintenance fee cannot sustainably grow faster than rental fee because at some point owners will not be willing to rent, drying up the pool of available rental points and thus push rental prices up. There may be fluctuations on the spread based on the economic cycle, but it should normalize over the life of the contract.
2) Disney changes the rule on you down the road that limits your ability to rent. I don't see how they can do this without destroying the resale market, and I think they prefer a vibrant resale market to sell their direct points. But if they make it more restrictive then those points aren't too bad for vacations either.

Anyways, just throwing a counter argument out there.

Interesting post, thanks for sharing. I like how you presented to very realistic risks, but I think that you refuted them too quickly. Just about every other timeshare system out there has owners renting their weeks just to cover their maintenance fees. I believe that Disney is unique in that owners regularly "profit" by renting out their points. I think the spread between point rental prices and maintenance fees will only continue to shrink, which does mess with the numbers a bit.

I also disagree with the notion that Disney cares about the resale market. I don't think that they care about the health of the resale market at all. They have magic and pixie dust and memories to sell their direct points. Most salespeople don't even mention resales during their sales presentation.

Finally, what worries me about your approach is that although the contract does generate points (and potential income) for 40 years, the first 10 years are simply a return of principal. Real gains don't occur until after that point. In ten years the landscape can be quite different.

I'm going to bookmark this post and revisit it in 10 years and again in 40. I think in hindsight we'll all have a lot more to say on the topic.

 

[Galun]

Interesting post, thanks for sharing. I like how you presented to very realistic risks, but I think that you refuted them too quickly. Just about every other timeshare system out there has owners renting their weeks just to cover their maintenance fees. I believe that Disney is unique in that owners regularly "profit" by renting out their points. I think the spread between point rental prices and maintenance fees will only continue to shrink, which does mess with the numbers a bit.

I think DVC is unique for two reasons. 1) Normal timeshares compete with other lodging options, but there is no substitution for a Disney property. People who consider normal timeshare can easily find other lodging options if timeshare doesn't work out, but if you want Disney you have no choice. It creates a much more balanced supply / demand picture that is good for the DVC owner. 2) Within DVC there is a pretty clearly established rental value for the properties - Disney often rent DVC inventory themselves for a direct apples to apples comparison, or there are hotel rooms that are somewhat comparable to DVC villas. The prospective renter can get an Aulani room for $550, or try to get a somewhat equivalent studio for about half price. As long as there is a sufficient spread between Disney hotel rack rate and the going DVC rental rate, then I think the spread between the DVC rental rate and MF can be maintained.

I also disagree with the notion that Disney cares about the resale market. I don't think that they care about the health of the resale market at all. They have magic and pixie dust and memories to sell their direct points. Most salespeople don't even mention resales during their sales presentation.

Interesting angle. Thanks. I had never been to a DVC presentation before.

Finally, what worries me about your approach is that although the contract does generate points (and potential income) for 40 years, the first 10 years are simply a return of principal. Real gains don't occur until after that point. In ten years the landscape can be quite different.

Well when you think about it, any capital investment is like how you describe. You buy a house and it takes 30 years or whatever to pay off before you live "free" in it, you buy a taxi and it takes x years for you to earn enough in fares to pay it off, etc. Removing the emotional aspect of the vacation, this is really no different. The taxi is probably the better analogy than the house because DVC contract theoretically has no residual value when they expire, just like a car when it eventually breaks down to be worthless. It's about 7 years pay back on DVC if you buy correctly, for internal rate of return in the mid to high teens over 40 years. Of course the future landscape may be different and future cash flow can change. But then you can't get that kind of ROI even with the crappiest junk bond, and this is much safer than that IMO.

I'm going to bookmark this post and revisit it in 10 years and again in 40. I think in hindsight we'll all have a lot more to say on the topic.

Maybe a hurricane will wipe out the property tomorrow and insurance pays out! If Disney is selling those points at $130, then the insurance company should pay out to me at the same rate right?

 

[MNMickeyGuy]

Keep in mind as that there is a value to the DVC contract that you buy. At some point (if you don't hold it to the expiration date in the distant future), you would be able to put your contract up for sale on the resale market.

Obviously, it will depreciate over time, but from what I have seen, they do hold a reasonable percentage of their value, which you would be able to recoup.

 

[bighoo93]

Finally, what worries me about your approach is that although the contract does generate points (and potential income) for 40 years, the first 10 years are simply a return of principal. Real gains don't occur until after that point.

That's not quite right. Return of principle is when you actually receive back part of your investment. That isn't the case for cash flow from renting DVC points. You still own the same number of points. You could make the case that you have lost one year of use, but that is far less than the cash flow. I think what you mean is that it takes a number of years to reach the payback or breakeven point. But that isn't a negative, its just a characteristic of a cash-generating asset.

 

[ELMC]

That's not quite right. Return of principle is when you actually receive back part of your investment. That isn't the case for cash flow from renting DVC points. You still own the same number of points. You could make the case that you have lost one year of use, but that is far less than the cash flow. I think what you mean is that it takes a number of years to reach the payback or breakeven point. But that isn't a negative, its just a characteristic of a cash-generating asset.

No, I am assigning a value of zero to the contract in ten years, so I view the rental income as return of principal. The problem remains that there is no guarantee that your initial investment will have any residual value ten years out. So if that is the case, then you have accomplished nothing other than writing a big check and collecting portions of it back over a ten year period. Posters in this thread are assigning the attributes of an investment to DVC and assuming that it will behave the same way. But it most likely won't, as it is a timeshare, not a bond fund or money market account. I don't view it as a cash generating asset as you described, because as it is generating cash it is also depreciating. I appreciate the thinking in this thread, but I think that too many advocates are ignoring the long term risks.

That being said, if you were fortunate enough to buy triple loaded contracts at last year's prices, your "break even" point could be anywhere between 4-6 years. Then the strategy laid out in this thread becomes a little more viable.

 

[bighoo93]

No, I am assigning a value of zero to the contract in ten years, so I view the rental income as return of principal. The problem remains that there is no guarantee that your initial investment will have any residual value ten years out. So if that is the case, then you have accomplished nothing other than writing a big check and collecting portions of it back over a ten year period. Posters in this thread are assigning the attributes of an investment to DVC and assuming that it will behave the same way. But it most likely won't, as it is a timeshare, not a bond fund or money market account. I don't view it as a cash generating asset as you described, because as it is generating cash it is also depreciating. I appreciate the thinking in this thread, but I think that too many advocates are ignoring the long term risks.

My DVC points have a value of zero in 41 years. Why do you assume they will have a value of zero in ten? What kinds of things do you see happening within the next decade that will make DVC points completely worthless, and what do you think is the probability of them happening? I'm not sure people are ignoring risks like that, I think they might just assign them an extremely low probability of happening.

 

[Dean]

My DVC points have a value of zero in 41 years. Why do you assume they will have a value of zero in ten? What kinds of things do you see happening within the next decade that will make DVC points completely worthless, and what do you think is the probability of them happening? I'm not sure people are ignoring risks like that, I think they might just assign them an extremely low probability of happening.

looked at from a $$$ investment standpoint, DVC is a high risk investment. There are a lot of things that could change going forward and most are negative. Because DVC has a reducing value by nature of the RTU, one has to recoup that principle over time just to break even. For these reasons it's most reasonable to look at a return of principle over 10 years which is a pretty standard timeline for high risk investments, esp those that do not appreciate in value. IMO if you have to go to the end of the RTU to make the numbers work, DVC is not a good option from a dollar standpoint.

 

[bighoo93]

looked at from a $$$ investment standpoint, DVC is a high risk investment. There are a lot of things that could change going forward and most are negative. Because DVC has a reducing value by nature of the RTU, one has to recoup that principle over time just to break even. For these reasons it's most reasonable to look at a return of principle over 10 years which is a pretty standard timeline for high risk investments, esp those that do not appreciate in value. IMO if you have to go to the end of the RTU to make the numbers work, DVC is not a good option from a dollar standpoint.

I was just asking what risks people anticipate that would cause the DVC points to have zero value in 10 years, and what they think they approximate probability of those things happening are.

 

[Dean]

I was just asking what risks people anticipate that would cause the DVC points to have zero value in 10 years, and what they think they approximate probability of those things happening are.

Risks that could make DVC as costly or even more costly to own OR make it worth close to zero are numerous. Whether they'll happen, no one knows. Historically resales have been around 80% of retail but now that number has dropped to around 50% for most options. Specific risks would include declining interest in the parks, increasing maint fees, poor upkeep, special assessments (or threat's of them) as well as general economy issues which have had a fairly large impact on DVC in the past, esp following 9/11 and recently.

However, I don't think equating DVC with having value or no value in 10 years is the same as looking at it from an investment standpoint and expecting a ROP over that 10 year period. They are not one and the same. If any of us expected DVC to be worth nothing in 10 years, we wouldn't own or buy. However, for a high risk investment, you want anything after 10 years to be gravy. IMO the risk for DVC, and timeshares in general, isn't 10 years from now but 20-40. DVC is likely a little less than most but more than most people think it is. If one owns at 10 years, the likelihood is they'll continue to own whether they want to or now.

 

[bighoo93]

Risks that could make DVC... worth close to zero are numerous. Whether they'll happen, no one knows.

I'm just asking for some examples. And just approximate the likelihood, everyone knows predicting the future is difficult and I said that in the post. Personally I think the chances of DVC points being worth zero in ten years are vanishingly small. I'd be interested in hearing the rationale from those who have a different point of view on that.

 

[ELMC]

I'm just asking for some examples. And just approximate the likelihood, everyone knows predicting the future is difficult and I said that in the post. Personally I think the chances of DVC points being worth zero in ten years are vanishingly small. I'd be interested in hearing the rationale from those who have a different point of view on that.

The fact of the matter is that a large number of timeshares have a resale value of close to zero. That is why you see so many of them on eBay for a dollar. Yes, I understand that DVC is different in that it is on Disney property. But it is still a timeshare, and it has an expiration date. These are two strikes against it when considering it an investment. DVC will always have value in terms of right to use, in that you will get points every year and you will be able to use them for a stay every year. But there are situations that are very likely that can negatively influence the cash value of a DVC contract. If point rental prices increase at a slower rate than maintenance fees, it could be more beneficial to simply rent than to own. If DVD decides to enact some real restrictions on resales, more people might be tempted to buy direct. Both of these instances are likely to occur, and both could arguably have seriously detrimental effects on the demand for resale contracts. Then the basic principles of economics enter into play and your contract's cash value approaches zero.

I don't know if this will happen. I'm not saying that it will. But I'm saying that these are very real risks and that they are likely enough that I will not use a 30-40 year horizon to judge the long term rate of return on a DVC purchase. I am fiscally conservative, and I like exit strategies. If something happens that makes the rental plan unviable, AND you can't get out because your initial "investment" depreciated by 80%, then you're in a bad situation. Remember, maintenance fee increases are compounding whereas point rental prices are incremental. Vero Beach maintenance fees will be dangerously close to the point rental prices in five years, given the current trajectory. While I understand that this is a worse case scenario, it may also be a predictor of the future of DVC. Given that these potential scenarios are not unimaginable, I don't view treating DVC as an investment as a wise decision. Even though DVC might have certain attributes of an investment, it is first and foremost a timeshare. And Disney or not, we all know what kind of investments timeshares are.

For me personally, I will continue to value my DVC contract in terms of the use I get out of it. I performed a cost/benefit analysis of owning vs. renting and am happy with the results. When I no longer wish to visit Disney, I will sell it for whatever I can get for it, knowing that I have already extracted value out of it from its use.

 

[ThumpersWorld]

A risk that we worry about is on the supply side. If DVD decides to dump another 2k+ new units on the market as they did in the last decade, this could depress things both on the resale and rental side. Hopefully they learned a few lessons from the past and will follow a policy of gradualism.

Conversely on the demand side, an active Disney in the resale market via rofr can give a nice boost to the market when there is a limited amount of new construction to unload.

 

[DougEMG]

I look at my investments as a way of funding my retirement (food, shelter, clothing, etc) while I look at owning and renting DVC points as a way of vacationing while I'm retired. So for me there is a definite difference on how I look at and treat the two.

 

[k3chantal]

I look at my investments as a way of funding my retirement (food, shelter, clothing, etc) while I look at owning and renting DVC points as a way of vacationing while I'm retired. So for me there is a definite difference on how I look at and treat the two.

Healthy viewpoint!

 

[BlazerFan]

I look at my investments as a way of funding my retirement (food, shelter, clothing, etc) while I look at owning and renting DVC points as a way of vacationing while I'm retired. So for me there is a definite difference on how I look at and treat the two.

I'm with you Doug.

 

[Galun]

Risks that could make DVC as costly or even more costly to own OR make it worth close to zero are numerous. Whether they'll happen, no one knows. Historically resales have been around 80% of retail but now that number has dropped to around 50% for most options. Specific risks would include declining interest in the parks, increasing maint fees, poor upkeep, special assessments (or threat's of them) as well as general economy issues which have had a fairly large impact on DVC in the past, esp following 9/11 and recently.

However, I don't think equating DVC with having value or no value in 10 years is the same as looking at it from an investment standpoint and expecting a ROP over that 10 year period. They are not one and the same. If any of us expected DVC to be worth nothing in 10 years, we wouldn't own or buy. However, for a high risk investment, you want anything after 10 years to be gravy. IMO the risk for DVC, and timeshares in general, isn't 10 years from now but 20-40. DVC is likely a little less than most but more than most people think it is. If one owns at 10 years, the likelihood is they'll continue to own whether they want to or now.

10 years is an arbitrary point in time. Why not pick 5? Or 15? Or 20?

When you look at any investment and want to calculate the return on investment, you evaluate your projected cash flow against your initial capital outlay and come up with a discount rate. That discount rate is your ROI. An ROI of mid to high teens is definitely indicative of a high risk investment. The question is whether you think the actual risk is higher or lower than the implied ROI. If it is, then you don't buy. If it is not, then you buy.

 

[crisi]

Been members for a decade, and we are down money.

We have had wonderful vacations, stayed in nice accommodations, put our kids in a separate room and would be able to sell for what we bought. But without DVC we'd never vacation at Disney as often, wouldn't stay in a multi room unit when we did. We certainly wouldn't have paid lodging expenses for friends and family.

Its been a good value, but "break even" - no.