Vacations are wonderful. Whether you enjoy lounging on a beach or hiking in the mountains, vacations normally make us happy and feeling refreshed. Have you ever fallen in love with a particular vacation location? If you are like most people, chances are one comes to mind.
While timeshares are tempting purchases, you shouldn’t think of them as investments. The Federal Trade Commission (FTC) cautions people against thinking of timeshares as investments because the resale value may be lower than what was paid (see FTC article here). It is better to consider the entire purchase that of a future vacation. An investment, by nature, should appreciate in value; and timeshares rarely, if ever, do. There are many different types of timeshares and options – let’s cover a few before we explain the downsides.
You can buy two types of timeshares:
- Deeded: You actually purchase an ownership interest in the property, which can be left to heirs or sold.
- Non-deeded: This is essentially a lease, where you can use the property for a specified amount of time each year for a limited number of years.
These two types of timeshares are then split out into the following primary categories:
- Fixed week: You have the right to use the property for a specified two weeks each year (Example: February 1st through February 14th).
- Floating week: You have the right to use the property for one week during a specified window of time (Example: One week, sometime between January 1st and March 1st).
- Points-based plans: You purchase points, which can then be used for a specified amount of time at one or more resorts. The amount of points required will vary based on the time of year you want to use the resort, the amount of time you want to stay, location, and a few other factors.
These are the basic options for timeshares. If you are interested in the other options, see the FTC article, which goes into greater detail about the options available.
Now that we have the basics down, let’s go into why timeshares probably don’t make sense for most people:
First, financing a timeshare can be extremely expensive. Most financing rates are in the neighborhood of 14 percent, higher than some credit cards. If you are considering financing a timeshare, it would be worthwhile to check with your local bank or credit union to see if you could obtain a personal loan at a lower rate.
Next, timeshares have pesky annual fees. While fees vary significantly, the average annual maintenance cost was $776 a year in 2011. Many people end up making purchases during sales-driven presentations offering great benefits and perks, without weighing the effect of the annual maintenance fee. In fact, the resale market for timeshares is filled with properties listed for one dollar because people just want to be free from the mandatory annual fee associated with it. The resale market is filled with scammers. If you are in the market, be wary of the company, and do thorough research just like with any other major purchase.
Lastly, a non-financial aspect of a timeshare to consider is the location. Will that same location you like today be desirable in the future? If not, what are the rules regarding switching locations? Each timeshare, and the rules pertaining to them, are very different. It’s important to read the fine print and ask for everything in writing.
All in all, if you feel comfortable committing to the annual fee, don’t need financing and think you will use it for a large portion of your life, it might make sense to consider purchasing a timeshare. One suggestion to see if it makes sense is to calculate what a similar vacation each year might cost if you rented or reserved a hotel room instead. How do the costs compare to an investment in a timeshare (including the annual maintenance fees)? What is the break even? Is it after 10 years? Is it longer?
As with all purchases, it’s essential to do the careful research and consider the possibilities in the future; a timeshare is no small purchase. Each individual has different needs, so it is difficult to say whether a timeshare purchase would make sense in every scenario. If you have questions about whether it might make sense in your situation, contact your Empirical Advisor.