Renting out DVC points and addonitus

[EM Lawrence]

Know yourself. Will you be able to consistently resist the temptation to use the points for yourself - to go more often, stay in larger accommodations, invite others along, etc.

My advice is to be absolutely sure you can afford the dues without renting before proceeding.

This right here is the biggest risk! I would probably be very tempted to use the points for myself “just this year” every year. We do have limited vacation time, so it would be many years before I could go as often as I’d like, but the temptation to stay in bigger rooms would definitely be there. At the end of the day though, we could afford the dues for the whole contract.

Since the dues end up being a bigger expense over time than the initial purchase price, this just seems like a smart way to control cost long term.

But it is definitely much less risky just to buy what we “need.”

 

[DougEMG]

And much less risky! Will the glut of points make DVC rentals even possible at the in-demand resorts over the next 12-24 months? When everyone is vaccinated will everything worth renting book out in minutes or hours at 11 months? I don’t know! Will Disney be discounting like crazy for a while making rentals a far worse deal? I don’t know! Will the changing point charts that are putting rental rates on par with or occasionally even higher than cash rates on certain dates have a serious impact on demand? I don’t know!

I know I’d want to know before i spent $60K or whatever on the assumption that everything will be the same post pandemic as it was pre-pandemic.

As mentioned above, there are just too many unknowns out there so that I would not be buying points right now to rent out. These days I spend more time thinking about if I should unload some of my extra points so I don't have to rent them out.

 

[EM Lawrence]

I think I’ve talked myself out of this for the time being. I still like the idea, and it seem like people don’t have any trouble renting points on the rent/trade page here. But unless the perks for staying on-site become stronger in the future, it feels risky to assume that the demand for on-site rentals will remain as strong as it has been. I’m optimistic Disney will do something to make up for the price difference of on-site and off-site eventually, but I think I better wait until they do.

 

[DVC Doctor]

I’d like to resurrect this thread. I get that buying a large amount of DVC points in order to turn a profit probably does not make a lot of sense compared to other investing strategies.

But what if you can afford to pay cash for a large contract, and then rent half of the points every year to cover the annual dues for the whole contract? The goal is not to turn a profit, but instead to cover your ongoing expenses.

In this scenario, what would be the downside? Obviously if the rental market dries up you are stuck paying all of the dues. And there is always the risk of a problem renter, or another pandemic/catastrophe that wreaks havoc on the rental market. Aside from those things, are there downsides that I have overlooked?

I may not have considered all the angles, and I’m sure there a plenty of people that do this. Any advice?

The key phrase here is "if you can afford to pay cash" and if that is true, then this is an acceptable plan

Assume a 500 point buy @ $130pp and annual dues of $7pp = $65,000 buy + $3,500 year dues

Rent 250 points at $15pp = $3,750 income to pay your annual dues

Thus, for a $65,000 investment and making sure you rent 250 points every year, then your Disney trips are technically free (or at least 250 points per year use are free).

I would probably advise just buying 250 points for $32,500 and simply enjoy them and keep $32,500 invested somewhere else. Of course these numbers will change depending on purchase price and annual dues and I simply used easy to calculate numbers.

 

[Lorana]

$32,500 invested at 8% annual return and 22% tax rate with $3500 annual withdrawals will cover 14.5 years of dues. Whereas $32,500 bought into DVC provides the points to cover dues for the lifetime of the contract (33 years for SSR).

Of course both of these make pretty big assumptions - that your rate of return would remain 8% over 14.5 years. That DVC Dues increases won’t outpace the amount you can get for rentals, and that the rental market remains viable.

[Edited to correct my mistake. SSR expires in 33 years, not 23. ]

 

[Bing Showei]

Update for those playing along...

OP decided yolos and now owns an additional 1,500 points. It’s like watching a reality show with spin-off episodes over in the ROFR and rent/trade boards.

 

[TinyTGO]

Update for those playing along...

OP decided yolos and now owns an additional 1,500 points. It’s like watching a reality show with spin-off episodes over in the ROFR and rent/trade boards.

what's an OP?

 

[Marionnette]

what's an OP?

Original Poster

 

[Brian Noble]

Assume a 500 point buy @ $130pp and annual dues of $7pp = $65,000 buy + $3,500 year dues

Rent 250 points at $15pp = $3,750 income to pay your annual dues

Just to put a number on this: the rate of return on the "extra" 250 points is ($15-$7)/$130, or 6.2%. That's a pre-tax return, and it will be taxed at your highest marginal income tax rate, not the lower capital gains rate.

I think there are plenty of places where I can do better than DVC point rentals over the long run, particularly on an after-tax basis, and that's why I think buying to rent is a bad idea.

(Edited to fix my math. I used $150 as a denominator, not $130).

 

[Brian Noble]

$32,500 invested at 8% annual return and 22% tax rate with $3500 annual withdrawals will cover 14.5 years of dues. Whereas $32,500 bought into DVC provides the points to cover dues for the lifetime of the contract (23 years for SSR).

You have to add the annual dues you are not paying on the extra points to the investment account to have an apples-to-apples comparison, I think.

 

[DVC Doctor]

im in the UK. So may or may not declare the income............

Hmmm...interesting strategy

Update for those playing along...

OP decided yolos and now owns an additional 1,500 points. It’s like watching a reality show with spin-off episodes over in the ROFR and rent/trade boards.

1,500 additional points is a serious add-on and serious annual dues

Hopefully this rental business investment (apparently with zero taxes) works out well for the OP

 

[Lorana]

You have to add the annual dues you are not paying on the extra points to the investment account to have an apples-to-apples comparison, I think.

Given that the point of buying the extra points is to rent to cover dues, you’d never be paying those annual fees. Thus you wouldn’t add them to the investment account, as you’d never pay them either way (or, you spend $32500 for 250 extra points to rent out every year, or you invest the $32,500. Either way, you’re not outlying $1750 on annual dues for those $250 points).

Hopefully this rental business investment (apparently with zero taxes) works out well for the OP

Ah, that’s a good point. Taxes on the rental income weren’t factored into the equation. So if you assume 22% taxes, those extra 250 points will only cover $2925 of annual dues, leaving you with $575 owed each year. This changes the math. If you invest $32,500 and get 8% return with 22% tax bracket and withdraw only $2925 each year, you’d cover ALMOST 24 years of dues. Of course dues will continue to increase during this time, but I don’t have the time right now to try to figure out the real math on all of this.

Of course if you’re buying 500 SSR points and paying $130/point, you’ve overpaid to buy in.

[Edited to correct my mistake in the math above. ]

 

[TinyTGO]

I think including taxes as part of the equation is moot and trying to be more sophisticated than it is. Regardless of the investment, all positive returning investments are taxable events.

Also, to compare a stock investment to rental DVC income is erroneous for a number of reasons. It would be a closer comparison to an apartment or condo.

 

[CastAStone]

I think including taxes as part of the equation is moot and trying to be more sophisticated than it is. Regardless of the investment, all positive returning investments are taxable events.

Also, to compare a stock investment to rental DVC income is erroneous for a number of reasons. It would be a closer comparison to an apartment or condo.

DVC rentals are taxed as income. Investments are taxed as capital gains and/or dividends. The latter is generally lower.

 

[TinyTGO]

DVC rentals are taxed as income. Investments are taxed as capital gains and/or dividends. The latter is generally lower.

it's only a LT capital gain on the sale of the asset. dividends are taxed as income. DVC is also depreciable, like an apartment.

'Investments' is a vague term. If the investment is a CD, the interest is taxed as income. Dividends, unless in a tax deferred account, are also taxed as income. Buying a stock and holding it will be taxed at capital gains tax rate after 12 months, but so will a DVC sale. Corp bonds are also taxed as income.

I'm not advising one buy a DVC timeshare as an investment, simply pointing out that the comparison to equities isn't accurate and that all income is taxed regardless of the vehicle that delivers it.

 

[EM Lawrence]

For rental income, would it be offset by the dues you pay? If you made $4k renting half your points, but paid $4k in dues, would you actually have income to tax?

 

[TinyTGO]

For rental income, would it be offset by the dues you pay? If you made $4k renting half your points, but paid $4k in dues, would you actually have income to tax?

vacation property is tricky. you shouldn't mix with personal use. one membership for rental and one for personal use. Once you mix personal use the ability to take deductions is limited.

 

[TinyTGO]

for reference, i'm not a CPA, but I do use one and half listen when she talks to me

 

[Lorana]

Also, to compare a stock investment to rental DVC income is erroneous for a number of reasons. It would be a closer comparison to an apartment or condo.

I think it's fair to compare here, since the question was to buy extra points to rent to cover dues, or to invest that money and use the investment to pay for dues. I was just trying to give a long term comparison.

Obviously, your rate of return on investments changes the number. 10% return gets you 16.5 years. If you only pay 10% tax on withdrawals, and get 10% return, you go to 20 years. A 12% annual return, you are earning more than you're withdrawing, and it'll sustain you for the life of the loans. But that's assuming you earn 12% annually for the life of your DVC ownership, too.

 

[gisele2]

I want to know if macman123 bought the extra points...