Pricing of Rental Points

[Doctor P]

I find most of these point renting discussion to be truly idiotic. Let me give you an example--I buy my house for $150,000 in year 1, and let's say my mortgage payment is $1200 per month (plausible with taxes and insurance in a hot market). Ten years later (or about the same time period since the original DVC purchases), my house is now worth $350,000 in a hot housing market. I can rent my house out for $3500 per month, and I can get a hotel room/suite for a vacation at $80 per night. Using the reasoning of some on this board, I would be an idiot if I took a month's vacation and didn't rent my house out and pay for it out of the proceeds of my rental. Or, even more on point, I can rent a full suite for $100 per night, so I should move out of my house and rent it so that I can make my $6,000 profit on my new rental home! I don't think so!!!!!!!! Even at $84 per point, the per year point cost is only a little over $2 per point. Add dues to that and you might generously be up to the high $6.00 per point even with interest included!!!! If you bought in for $60 per point, the total cost of ownership is going to be below $6 per point. Could I make more money renting my points and buying a DCL cruise with the proceeds? Yes, if the rental arrangement worked out. Is DVC/DCL screwing me by valuing my points at about $7 per point? Hardly.

 

[DGuiltinan]

I don't agree with your assessment of the value of a point. You can't just take the price and divide it by the life of the contract and say $2 per point!!

Rather, you must take opportunity cost into account.

I hope I keep this simple. If a point cost you $60, and you paid in full, in cash, you bypassed an opportunity to put that same $60 in a mutual fund. If you agree that in the long run mutual funds will net a 10% return on investment, then the opportunity cost of your DVC investment is $6 per point per year (10% of $60).

If you add the maintenance (let's say $4) to the $6, you are looking at a cost to you of $10 per point per year. So, as much as I would like to see points trading for $9, I do feel for the DVC owners, and understand their wanting to get $10 or more per point.

 

[Doctor P]

Actually, you have misappropriate the term and usage of opportunity cost. I assure you, as a Ph.D. economist and nonpracticing C.P.A., I fully understand the notion of opportunity cost and investment criteria. Indeed, in the past I have run a full blown model on the DVC "investment" I made, and the results do not come out at all different qualitatively and they are minimally different quantitatively. Without going into the details, suffice to say that phrasing the argument about opportunity costs in the above manner ignores all alternative vacation costs. I will definitely agree with the appropriate conclusion of the above opportunity cost analysis: you save money by not taking a vacation.

 

[tigger13]

I guess I have to agree with Richyams, I generally don't rent but have been for the last couple years to pay the "DVC Mortgage" since I have been laid off and can't find a decent job in my field. I don't plan to rent once I can afford to make the payments with my job. $10 -11 per point is paying the mortgage for about 9-10 months and I can deal with the remaining months.

Just my $.02

 

[DGuiltinan]

I do not need to take alternate vacation costs into account when valuing the cost of a DVC point.

But, if you insist, since I save $10 per point, and since 150 points might represent an average investment level, I save $1,500 per year, with which I can do whatever I please.

I have the freedom to rent DVC points for $10 (no problem), and stay in a BCV studio for the same cost as any DVC owner, about $120 per night. Or, I have the freedom to do something else. The only difference is I have no risk, including that points will expire unused, or risk that I will be a cheated in a rental deal.

But, this was NOT the point of my post, I merely wanted to point out that you, a DVC owner, and a "non-practicing CPA", should know better than to say that DVC points are only worth $2 per year, plus maintenance.

 

[RWishbone]

I disgree with you also Doc P. Look at it his way - most people have to finance the purchase price of the DVC. In purchasing a home - to use your analogy- a person who buys a $300,000 home and finances it over 30 years does not end up paying $10,000 per year to pay off the mortgage. To suggest that the true cost to the DVC owner is simply to divide the cost by the number of years is overly simplistic and incorrect.

When the cost of renting comes up, it always seems that the people who would be willing to rent their points for an extremely low number, and I am referring to unrestricted points, are always referring to what they would do if they could not use their points for a certain period. When someone starts renting their points for $6 per point, then I will start to listen to their opinion a little more carefully. By the way, if someone wants to rent their points for $6 per point, please let me know.

I have never rented out my points but no one will ever convince me thet the true cost of those points is only $6-$7 per year

 

[poj7]

I thought this wasn't supposed to be an investment? In fact, I know it was specifically presented NOT as an investment. It's a shame some people are working the system and profiting from the DVC. It should be for private use only or for guests. Guests are individuals known personally by the owner.

We own a vacation home in NH and would never think of renting it. Unfortunately, renters tend not to take care of things the way owners do. I draw the same parallels to the DVC situation. Increased wear and tear by people who don't own equates to higher maintenance fees.

I know the response will be, "we're entitled to rent as many of our points as we like." My response is, that's unfortunate. What's also unfortunate is that DVC cannot realistically crack down on those members who are abusing the system.

Paul

 

[VWL2001]

Before we became DVC owners, we stayed at Dixie Landings, Carribean Beach, and All Star Movies. We paid regular Disney rates for all, because we didn't know any better.

Now we're DVC members, and really enjoy staying at "Deluxe" accomodations, but don't fool ourselves by saying we're saving so much money over Disney Deluxe rates, because without DVC we'd still be staying at Moderates or less. We don't look at it as a great investment, we look at it as a prepaid vacation with nicer accomodations.

You can bet that the people who look to rent on these boards are not comparing Disney Deluxe rates to what you charge. They're looking for better than all-stars at a comparable fee. If you charge too much you're going to price yourself right out of the market. Now that we know about discount codes, we've stayed at Deluxe resorts (AKL) for less than we'd pay for the points at $10 per point and had maid service.

And those that look at the time value of money, please don't forget that the money (including interest) from your mortgage to DVC would probably be spent on a different vacation if you weren't paying it to DVC. So you can't compound interest. Each year must be taken separately.

If we ever don't use all of our points and will lose them, I will definitely sell them for less than the $10 people, because I don't want to see them lost. But I don't ever expect that to happen, because we enjoy taking vacations. We're not in it for the money!

 

[Doctor P]

Obviously, many persons did not read my previous posts clearly. I never said that DVC points were worth $2 plus maintenance costs per year. What I said was that the costs of ownership are approximated by those figures (and, I might add, for most DVC owners that includes consideration of interest). My point is that an argument that one needs $10-11 per point to "break even" is specious, NOT that one shouldn't rent for $10, $11, or what the market will bear. Also, everyone has a different tolerance for risk and for the amount of work they are willing to put in to rent their points--thus, for some people, renting at $7 is OK, but for others they may want $10 to take account of their costs in finding a suitable renter. The true cost for most DVC owners does not exceed $7 per point. Sorry if I confuse some with the actual facts rather than voodoo arithmetic.

I stand by my statement that one must compare vacation costs to vacation costs to evaluate DVC financially. Comparing to a mutual fund investment is comparing apples to oranges unless one makes periodic withdrawals for vacations. By the way, DVC has greatly outperformed my mutual funds these past few years. I could get my original investment (not accounting for maintenance fees) back out of DVC today. I can't say that about many of my other investments these past three years, LOL.

 

[DGuiltinan]

Good point regarding mutual funds over the past few years....

I suppose my money would have been better spent on DVC membership!

All kidding aside, I really do not consider my calculations "voodoo arithmetic". I, like you, am a CPA, and I make my living assessing investment alternatives. I resent your comment.

I think my example presenting alternative uses of capital was logical, and well presented.

I would welcome the opinion of others reading this besides you!!

You seem to think that your way of thinking is the only correct way. I am beginning to think that perhaps you are not a "Doctor" at all, and that perhaps you are in DVC sales??

 

[ncligs]

"Doctor P vs DGuiltinan" tonight at 10:00 at the Debate board......don't miss it!!

 

[DGuiltinan]

lol!!!

 

[Halle]

Doctor P. I've enjoyed reading all of the posts. In one post you compared renting DVC to renting your primary residence, this raised a question for me. I believe that you can rent out your primary residence 2 weeks per year and not claim it as income(allowed by the IRS), what are the laws regarding timeshares, is there a limit to how many points we can rent without declaring the income?

 

[Doctor P]

Hey, I consider the discussion all in good fun! The voodoo arithmetic comment was made to offer some levity, but to also point out that the numbers I was using are really judgment free and do not require subjective valuations. My comments about my background were only intended to defend from the initial salvo regarding opportunity cost, not to impugn the motives of anyone else.

We bought into DVC in August 2000 at $67 per point. We paid off our loan early, but the total cost to us, including financing fees at Disney's exorbitant financing rates (hardly a true opportunity cost) only added approximately $11 per point (I reran the numbers). That's $78 per point, everything included. At that point, we had 43 years left to go. That means that our point cost, loaded for interest, in real terms was $1.81 per point. My dues at OKW have not risen to the $3.50 mark yet, but to be generous let's call it $3.50. That totals up to $5.31. I don't care what investment assumption one uses, my claim of a cost to me of $7.00 or less is reasonable under any return or opportunity cost scenario (that's a 30% plus margin for accounting for the opportunity cost). And there are many, many members whose fisc balance is better than mine.

DVC is a prepaid vacation plan, and the financial analysis should be based on vacation spending. Thus, the appropriate opportunity cost is using the money committed to DVC for some alternative vacation of comparable quality (since opportunity cost is built on the "next best alternative", not just any alternative, and is categorized within a particular decision calculus.)

As to the issue of renting out your DVC interest, frankly I am not sure of how the tax rules would work since your ownership interest is different than that of a typical vacation homeowner.

I think it is fascinating how so many disparate people have evaluated DVC differently yet all come to the same conclusion that DVC is somehow right for them. Cheers to all!

 

[Dean]

Originally posted by poj7
I thought this wasn't supposed to be an investment? In fact, I know it was specifically presented NOT as an investment. It's a shame some people are working the system and profiting from the DVC. It should be for private use only or for guests. Guests are individuals known personally by the owner.

We own a vacation home in NH and would never think of renting it. Unfortunately, renters tend not to take care of things the way owners do. I draw the same parallels to the DVC situation. Increased wear and tear by people who don't own equates to higher maintenance fees.

I know the response will be, "we're entitled to rent as many of our points as we like." My response is, that's unfortunate. What's also unfortunate is that DVC cannot realistically crack down on those members who are abusing the system.

Paul

The legal paperwork about not being an investment is a warning to the buyer of what they can expect and not expect, not what they can or can't do with their ownership. DVC members are expressly allowed to rent per FL law and the POS. Your definition of a guest is far more restrictive than that that DVC appropriately uses. DVC has no legal options to "crack down" on those renting their points. It's the way the system is set up for all the good and bad it entails.

As for renters being more destructive, I know of no documentation to support that. I'd venture that many take advantage because they OWN it as well and would suspect this is a far larger problem than renters. This is not like a single owner vacation home where it comes back to one family or a small group to deal with the direct costs. I think people who transiently occupy any type of hotel or condo are prone to abuses, owners and renters alike.

At the heart of this arguement is what is fair and not fair to the other owners. I would assert that no other owner owes another anything other than to follow the rules. If they means they reserve and rent out all the Xmas weeks, so be it. DVC could make changes that would decrease this likelyhood but it would have negative fall out that you would likely not like. Things like requiring a full weekend if you reserve Sunday or a 3-5 day minimum. They could even change it to a 7 day minimum with a large enough vote of the members. They could also change the 11/7 month window if they chose to say 4 months.

 

[DGuiltinan]

I'm trying my best to see this from your perspective. I think I am catching on. Perhaps what I am missing is the fact that you feel that by pre-paying, you are eliminating future price increases due to inflation.

The way I see it, when you fork over $70 to DVC, you have lost not only the $70, plus you have lost all the money that $70 could make for you, if it was in an interest bearing account for the next 43 years, rather than Disney's account.

But, you obviously don't see it like that. You seem indifferent to paying for your year 2043 vacation now or later. To me, this seems crazy, but perhaps I am forgetting that, if I wait until 2043, my room at the Beach Club may very well cost me $700 per night, even with my AARP discount!! You, on the other hand, will only be subject to inflation on your maintenance fees.

Am I catching on??

P.s., this is all in good fun to me too, Doc... Let's get together for a cocktail at the Beach Club in 2043 - I'm buying!!

 

[Tinkrbell]

DGuilitinan & Doctor P:
Neither of you mentioned the "time value of money" into your calculations.

 

[Dean]

Originally posted by Tinkrbell
DGuilitinan & Doctor P:
Neither of you mentioned the "time value of money" into your calculations.

I think that is what DGuilitinan is referring to in the post above yours.

DGuilitinan, when I discuss the cost of DVC, I always include the lost earnings on the principal as well as a return of principal. DVC is not for everyone but for many it's still the best value. Assume you would go and stay on property almost yearly and that you would not stay at the All Stars much or at all. If your reference point is the moderates, you'll likely break even or come out slightly ahead with much better accomodations. If you would stay part time at the Deluxe's, you will come out ahead with DVC. Of course this breaks down for weekends, stays off property and if you don't know if you'll visit WDW most year.

Compared to renting (currently at $10 pp), it's a break even for the newer properties but for those that buy resale, still an advantage to the owner over the renter plus you have more control and less risk. Assume you rent from me every year at what would be a break even cost compared to the overall cost of owning including the time value of money. Your risk is that you must send me a check and you don't have control. What if something happens. What if you have to cancel at the last minute? (Mine are non refundable).

Owning is not for everyone but I think many people have talked themselves into not owning that would be far better off in the long run if they had bought when they first knew about it.

 

[Poorman]

I read everything I could on DVC before I bought in. The on going debate at Mouseplanet convinced me to do it. I have posted a link to the last one I read before I bought. I think all I wanted was someone to say "it's okay, go do it". It is good reading especially if you go back to the first few posts in the debate.

Happy reading. Rich


http://www.mouseplanet.com/dtp/dvc/3_Debate/edaburn.htm

 

[MELSMICE]

Everyone has a right to do what they want with their points, however, where are the ethics in trying to "price gauge" potential renters.

If the going rate is $10/pt., then that's the going rate. We were fortunate enough to be able to rent at $8.50/pt. After staying at OKW we decided to buy a resale.

I certainly understand renting because you're going to lose your points or even if you are unable to use points because you can't afford a vacation that year, however, to do it as a "business to make money" is just not ethical in my opinion.

Those people that rent appreciate the honest owners that will rent to them for a fair price. I would find it hard to live with myself if I knew I was over charging someone for something.

(BTW - I own my own business & I charge the going rate for my service. To charge more would not be ethical & it would also get the customer to find somewhere else to take their business. Maybe not right away, but after they figured out I was offering the same service that the next guy is for a lower price - my business would certainly suffer).

Okay - I'm done ranting!!