Yet another analysis of DVC savings

[molly2004]

So I've finally managed to get DH excited about buying DVC next year. I had to really convince him that it was worthwhile. I know others have posted their own analyses of savings. They have all assumed that one would pay rack rates for the same accommodations had they not bought DVC. Well, I didn't find it useful for me because we would never pay rack rates for a DVC villa. What we would do instead is to rent points for the same. And, lo and behold, there are savings, too.

So my take on that savings analysis is this. I assume that point rental is at $10 per point (your savings would be greater if the cost per point were higher). I also assume that maintenance fees and cost of point rental to increase by 4% per year, and also that closing costs are about $2.50 per point, with a minimum of $250. Did I miss anything? This really helped solidify our decision. Now we just need to wait until next so we can save up to pay cash! Thanks to everyone for their thoughtful advice!

Cost analysis for SSR purchase

Summary of purchase
Points 150 Maintenance $3.85
Cost per point $90 Inflation 4%
Year 1 maint $578
Closing @ $2.50 per point $375
Total $ 14,453
Total maint fees $80,425
Grand total $94,877

Analysis
..........................................Cost of DVC......Cost of renting.......Savings with DVC
Average cost per year..............$ 1,977...... $ 4,526..................$ 2,549
Average cost per 2 years..........$ 3,953 ...... $ 9,052.................$ 5,099

 

[mydogdrew]

I would disagree with any long-term financial analysis that ignores the time value of money. The question is why are you spreading the initial cost of DVC evenly over time? If given the choice we would all choose to buy DVC over 50 years with no interest - that's what you are assuming. It would be more realistic to include the entire purchase price in year one and then see how long it takes to break even. By any analysis you don't save money in the first year.

Here's another example. I assume 150 points @ $90 with a rental value of $10 and fees of $5. Also, assume inflation impacts rental value and dues equally. If your plan was to rent all your points out until you "break even". That would take about 25 years (using a 3% discount rate). If you ignore the time value of money you would conclude it takes 18 years.

I often hear the argument that I don't plan to rent my points so that does not impact me. However, I would argue that the value of DVC must be measured against the rental value - its the only way to measure the fiancial savings.

The real question is will rental rates and dues move in concert over the long term. Recent history would indicate otherwise. I just don't think DVC is that great of a value at $90+. Now, if your starting point for renting is $12 and your purchase price is $80... that's entirely different.

 

[molly2004]

I would disagree with any long-term financial analysis that ignores the time value of money. The question is why are you spreading the initial cost of DVC evenly over time? If given the choice we would all choose to buy DVC over 50 years with no interest - that's what you are assuming. It would be more realistic to include the entire purchase price in year one and then see how long it takes to break even. By any analysis you don't save money in the first year.

Here's another example. I assume 150 points @ $90 with a rental value of $10 and fees of $5. Also, assume inflation impacts rental value and dues equally. If your plan was to rent all your points out until you "break even". That would take about 25 years (using a 3% discount rate). If you ignore the time value of money you would conclude it takes 18 years.

I often hear the argument that I don't plan to rent my points so that does not impact me. However, I would argue that the value of DVC must be measured against the rental value - its the only way to measure the fiancial savings.

The real question is will rental rates and dues move in concert over the long term. Recent history would indicate otherwise. I just don't think DVC is that great of a value at $90+. Now, if your starting point for renting is $12 and your purchase price is $80... that's entirely different.

Let me clarify that the analysis was meant to show how much I would save if I purchased a DVC contract as opposed to renting points from someone, not renting the points out once I bought them. I spread the initial cost over the life of the contract because I wanted to see how much it would average out per year so I can assess how that looks against how much I typically pay for accommodations each year.

To your point about front-loading the purchase cost of DVC into the first year and determining how long it would take to break even...my calculations show that for the above point allocation, it would take about 8 years, again comparing against how much it would cost to rent the same amount of points from another owner. However, in my viewpoint, looking at it that way does not take into account what I would be paying for the remainder of the contract's life in the form of dues. This is an important aspect in my decision process.

Granted, my analysis assumes a number of things. There are a number of things we cannot precisely predict. I feel that it serves as a reasonable model by which one can make a decision such as this one.

 

[mydogdrew]

Whatever works for you but the analysis you have laid out is not compelling. You asked if you were missing anything and the answer is yes! You must discount everything to current dollars to reach a reasonable conclusion.

I guess you are saying you will save $125,000 over the nest 50 years. Perhaps, but what is that worth in todays dollars? If you agreed to pay me $125,000 today and I paid you back $250,000 in fifty years you would also be ahead $125,000 over the same period. However, I would have the far better deal. It's not the absolute dollars that matter as much as the timing of the payments.

 

[molly2004]

Whatever works for you but the analysis you have laid out is not compelling. You asked if you were missing anything and the answer is yes! You must discount everything to current dollars to reach a reasonable conclusion.

I guess you are saying you will save $125,000 over the nest 50 years. Perhaps, but what is that worth in todays dollars? If you agreed to pay me $125,000 today and I paid you back $250,000 in fifty years you would also be ahead $125,000 over the same period. However, I would have the far better deal. It's not the absolute dollars that matter as much as the timing of the payments.

Hi, again. So, in a nutshell, are you saying that I need to depreciate the value of the purchase in order to make it a valid long-term analysis?

 

[bcvillastwo]

Whatever works for you but the analysis you have laid out is not compelling. You asked if you were missing anything and the answer is yes! You must discount everything to current dollars to reach a reasonable conclusion.

I've never been convinced that the "time value of money" argument is valid when someone is simply comparing renting something onsite @ WDW vs. buying into DVC and those were the only two choices.

I trained as an accountant, I understand the time value of money, I am aware of the importance of calculating the two cost streams and calculating net present value. I honestly don't see the necessity of factoring the time value of my money if my only have two choices for using this money is to either rent a room or prepay for the room.

The following link contains a discussion about the time value of money. It speaks about the concept from the standpoint of comparing investments. Therefore, unless an individual contemplating DVC was also contemplating the possibility of investing the money they put into DVC they may not need to consider the "time value of money" in their analysis. But, just to make sure I will (when I get time) rerun the numbers.

http://www.investopedia.com/articles/03/082703.asp

 

[mydogdrew]

I've never been convinced that the "time value of money" argument is valid when someone is simply comparing renting something onsite @ WDW vs. buying into DVC and those were the only two choices.

I trained as an accountant, I understand the time value of money, I am aware of the importance of calculating the two cost streams and calculating net present value. I honestly don't see the necessity of factoring the time value of my money if my only have two choices for using this money is to either rent a room or prepay for the room.

The following link contains a discussion about the time value of money. It speaks about the concept from the standpoint of comparing investments. Therefore, unless an individual contemplating DVC was also contemplating the possibility of investing the money they put into DVC they may not need to consider the "time value of money" in their analysis. But, just to make sure I will (when I get time) rerun the numbers.

http://www.investopedia.com/articles/03/082703.asp

You'll often hear someone say they paid $15k for 150 points for 50 years and conclude that their cost basis is $2 per point. The next step is they say this costs them $300 per year and add $5 per point for MF to reach a total annual "cost" of $1050. The next step is to compare with rental rate of $1500 for those points and conclude they are saving money. Well they are - just not as much as they think they are. The problem is they put dues that they will pay in 50 years on the same playing field as the $15,000 they paid on day one which is problematic.

Lets look at it one more way, assume DVC only had 10 years left and you were looking at a resale that cost $10,000 and you concluded that you would save $1,000 for each of those ten years by buying DVC - would you buy? The answer is no for two reasons - (1) you wont save any money and (2) for the same money you could defer your payments over time to yield the same result. The real question in this example is what should you pay up front in order to save $1,000 per year for 10 years - that's present value.

 

[Pa@okw95]

Buying into DVC is not a savings it is a very large expense.

 

[molly2004]

Buying into DVC is not a savings it is a very large expense.

DVC in and of itself is an expense, yes, but does it not save you money over an even larger expense, i.e., the sum cost of future accommodations. that is the question.

 

[Dean]

It's certainly more complicated than a simple compound interest scenario but I think one should at least consider the time value of money. And/or one should consider any interest paid, likely even more important in this scenario. And one should not use rack rates to compare to UNLESS that's what you'd pay for trips regardless. One should also realize that even the most avid Disney fan is likely to have changing vacation habits or needs over the years.