True cost of DVC points

[sjcampbl]

I know this is an age old question that has been debated to death on these forums. I believe I have a new angle that I'd like to explore for myself, but, I need the financial geniuses on these forums to help me learn how.

A simple way of calculating cost per point per year is to take the purchase price of the contract and amortize it over the remaining years at your current cost of funds, divide this number by the number of points, and add the yearly maintenance fees per point.

The problem I see with this method is it gives a straight line cost per year which does not account for inflation on the amortized amount (only on the maintenance fee amount). Essentially the early years are much more expensive than the later years. Is there a formula by which you could calculate your amortization payment, but, then consider your own exposure to inflation such that the amortized payment would increase over time and still pay off the principal at the end of the term while paying the lender your cost of funds?

 

[disneynutz]

And what happens when you decide to sell in 10 years? We sold several contracts a few years ago and took a $10,000 loss compared to the purchase prices. Resale prices are up now but you never know when the market will change.

Bill

 

[zavandor]

Probably everyone who ever tried this kind of calculations did it in a different way. The big question is: do you really want to calculate points cost over the whole life of the contract?
For many thinking to keep it for more than 10 years is unrealistic: preferences may change, children grow up, life happens. One way of calculating it, is splitting the cost of the contract over 10 years and consider the contract worthless after 10 years.
This is a safe calculation.

Or given how the resale market has worked out, you may consider the contract to be worth something in 10 years. 50% of how much you would pay resale now is safe enough, I think, and it would include inflation. So split half the cost of the contract over 10 years, add MF and that's your cost per point. Of course, a lot of assumptions here, but whatever system you are going to use, you need to make some.

 

[supersnoop]

This is always a difficult and highly debated question because of two issues, "it's complicated" and "it depends."

"It's complicated" because a DVC purchase costs you money in three different ways; the initial points purchase, the ongoing maintenance fees, and the accompanied expense of traveling and vacationing at Disney World or the other resorts.

"It depends" because there are multiple ways to factor the time value of money; whether you're looking to hedge inflation (calculating net present value) or evaluating opportunity costs.

In my estimation, simply dividing the initial purchase by the number of years is the correct way to calculate the net present value of the points. When you purchase the points, you're purchasing an inflation-protected asset. The first points are not more valuable than later points, because later points will still have the exact same purchasing power. If, on the other hand, you're calculating opportunity cost, you could use an annuity calculator to see what the difference between your expected rate of return and the rate of inflation will yield.

You should expect maintenance fees to rise at approximately the same rate as inflation. So, you're committing to spending the same amount of money on maintenance fees per year through the duration of the contract. Obviously, the amount will increase, but it should be roughly equivalent to the same amount in today's dollars.

The other vacation costs, such as tickets, on-site meals, and airfare seem to increase at a rate greater than inflation, so that could dig deeper into your budget.

And, finally, there's the remaining asset value; or the price you should expect to receive for the contract if you sell in the interim. While that it largely a market-based price and includes such intangible benefits of each home resort advantage, it's difficult to calculate, but a simple annuity calculator should give you a reasonable estimation.

 

[Dean]

I know this is an age old question that has been debated to death on these forums. I believe I have a new angle that I'd like to explore for myself, but, I need the financial geniuses on these forums to help me learn how.

A simple way of calculating cost per point per year is to take the purchase price of the contract and amortize it over the remaining years at your current cost of funds, divide this number by the number of points, and add the yearly maintenance fees per point.

The problem I see with this method is it gives a straight line cost per year which does not account for inflation on the amortized amount (only on the maintenance fee amount). Essentially the early years are much more expensive than the later years. Is there a formula by which you could calculate your amortization payment, but, then consider your own exposure to inflation such that the amortized payment would increase over time and still pay off the principal at the end of the term while paying the lender your cost of funds?

Everyone has their variation. I assume that I would vacation anyway at Disney and use the fund I'd pay for vacation anyway for what I'd spend otherwise (not the DVC rack rates). I'd assume maint fees not paid by not owning when to vacations. Then I'd invest any amount that would not be used the first 5 years in a true long term investment and the rest at MM rates. That puts about half of a resale at short term rates and the remaining half at investment rates (I use 8% after taxes). IMO, once one decides that DVC is an option, any reasonable look has to include the time value of the money used up front, the amount one would pay without DVC either Disney hotels or renting DVC if one values on property (shouldn't buy otherwise), dues increase at 3-4% but even then there's a lot of variation. One also must consider risk, both their own the that of owning a timeshare. Even the most conservative buyer is close to best case scenario because worst case scenario includes the parks closing and run away fees. To be clear, most of my stays are exchanges and much cheaper, but this is how I look at the points I own.

 

[Brian Noble]

The problem I see with this method is it gives a straight line cost per year which does not account for inflation on the amortized amount (only on the maintenance fee amount). Essentially the early years are much more expensive than the later years. Is there a formula by which you could calculate your amortization payment, but, then consider your own exposure to inflation such that the amortized payment would increase over time and still pay off the principal at the end of the term while paying the lender your cost of funds?

You have two terms: your amortized purchase cost (which you are computing correctly, IMO) and your annual dues. If you are computing NPV, you want to *discount* future-year first-term values by expected consumer inflation. The second term will increase based on increasing dues costs, but also must be discounted to NPV. In general, dues increases will outpace inflation, because Dues are labor-intensive and subject to Baulmol's cost disease.

Now, I'm going to give you an argument for ignoring the NPV calculation and just using the first-year costs flat. Consider an OKW-42 contract. Purchased at $70 w/ 5% cost of capital, the amortized purchase price is $4.44/year. Dues are about $5.84, for a total cost per point of $10.28. Suppose inflation is 1.5%, and dues increase 3.5%. So, the second year in NPV is ($4.44 + ($5.84 *1.035))/1.015, or $10.33. You could carry that forward, but just using flat-line first year costs for NPV in each future year is probably close enough. You aren't going to be able to predict cost of capital, inflation, and dues increase percentages so carefully that the difference is going to matter. Just know that you are probably being slightly optimistic for a resale (amortized value being discounted in future years is low) and slightly pessimistic for a developer purchase (because amortized value is high).

 

[bellablue2]

i personally have made money over the years and know many people who also say they have. i do think those that sold during the great recession probably took a hit. but what does it all matter anyway...one can pretty much always calculate a profit or a loss on owning dvc points, depending on her assumptions. you're either in for the ride or not.

 

[DVCcurious]

Every time this comes up I make the same point:

Don't forget to factor in the number of points required for a room at the resorts.

A 1BR in July is not the same number of points at VGF and OKW.

I think a much better way to look at this is to figure out a room category and season and then calculate the up front cost of the points needed and the dues for those points.

For example, VWL and BWV often sell for the same amount (roughly $80 per point) and have similar dues ($6.02 vs $6.07). They both have 1 bath in a 1BR, are similar sized (730 sq feet vw 800 sq feet), both expire in 2042. So you'd think they will cost you the same amount for the same experience over the life of the contract. But you'd be wrong.

A 1BR in July is
271 pts VWL
220 pts BWV (standard room)

If you were to buy VWL you'd need $4,000 more up front and $300 more per year to stay for the exact same week in the exact same room size and category (non-view room).

BWV is a better "value" than VWL due to this point requirement difference.

BTW I own at VWL because I love trees and I fear clowns.

The best deal is to buy SSR and stay at OKW. You can always get OKW at 7 months, which is not the case for BWV Standard and AKL Value. Then you get the best of both worlds: you get SSR's lower dues and longer contract period and you get OKW rock-bottom point requirement.

I almost did that for my second contract but I decided I cared more about location than money so we bought BLT. But if money was my top concern I'd buy SSR and stay at OKW. No other strategy comes close.