As a timeshare owner and someone who has consulted for a timeshare company, I can assure you that timeshares are poor, even horrible, investments. Here are the top 5 reasons you should never consider timeshares as an investment.
1. Time value of money
Investors should always be conscious of the time value of money. This is the basic assumption that money in hand today is better than the same amount tomorrow, or at any other time in the future. This assumption continues to be proven true thanks to inflation and opportunity cost (opportunity cost reflects the inability to pursue other opportunities because the funds are tied up).
With timeshares, you are charged a chunk of money up front for something you are planning to use in the future. Those of you who think financing will solve this may not be familiar with the rates being offered, which fluctuate in the range of unsecured credit card rates (but without the discount for those with high scores). That leaves one of two choices: pay high interest rates or pay a significant opportunity cost (since you’re essentially pre-paying vacations). Pre-paying for your vacation accommodations is the antithesis of leveraging cash flow producing investments.
2. Maintenance fees
All timeshares have maintenance fees. This means that every year, regardless of whether or not you actually use your week, you have to pay a fee. This maintenance fee goes up every year. The developers of these vacation properties have to charge enough in maintenance fees to not only cover the costs of running the resort, but also to cover the profit that the company doing the property management needs to make. Imagine if you bought a home and had to pay enough in maintenance fees to cover close to what you would have spent in rent.
3. A depreciating asset
Timeshares are like new cars: the second you drive them off the lot, they lose value. Timeshares lose 40 to 75 percent of their value once you purchase them. If cars depreciated that quickly, I doubt anyone would buy a new one without being subjected to timeshare-like sales tactics.
If you don’t believe me, do a quick test. Look for units for sale on the web in a resort in which you know the timeshare cost (it’s okay to admit that you’ve been to a timeshare presentation…we all have). You’ll find that the online listing amounts are typically 50 percent below the retail prices. Most of those aren’t even selling. Unfortunately, most people put so much money into timeshares and are so unrealistic about their actual value that they have a hard time pricing them at a market rate (the rate at which the unit would actually sell).
4. Rental rates are lower than you think
Have you ever visited Redweek, eBay or other sites that offer timeshare rentals? Be sure to check these sites before buying a timeshare. You can often rent someone else’s timeshare week for less than they are paying in maintenance fees. There are many timeshare owners out there who are unable to use their weeks for the present or coming year and will rent them out to other people. In fact, there are so many that they generally end up going for much less than the original asking prices. This is not something you will find out from the salespeople at the resorts.
Vacation is supposed to be your time away from the stress and the rat race. Do you really want to feel tied to a specific property every year? Timeshare salespeople know that many people don’t, so they fervently push the values of exchanging your units in order to travel anywhere in the world using an exchange company such as Resort Condominiums International (RCI) or Interval International (II). There are two things I’ve learned from my own timeshare experience that you should know about exchanging your timeshare:
- It is going to cost you more money. Now RCI or II has to get their cut of the action. That means an annual membership fee and a fee each time you wish to exchange. If you ever want to gift your week to someone, there’s another fee for that.
- Your exchange value diminishes over time. Most people want to travel and stay in newer resorts. That works great when your resort is new and in a great location, but what happens in 10, 15 or 20 years? What you are able to exchange into is based on what you are trading. If you think the developer will remodel it once it gets outdated, it’s time to get your head out of the clouds. Developers make their money up front. Remodeling, just like increased expenses for repairing roofs, grounds, etc., come from the owners, which means you could end up paying even more money. Let’s just hope you don’t buy a timeshare in hurricane country.
Timeshares can be a lifestyle expense (notice I didn’t say investment) if they are purchased in the right way and for the right reasons. It may make sense if you and your family know that you love a particular resort and would like to vacation there each year. However, timeshares are not an investment, and timeshare salespeople in most states are prohibited from even using that word.
Your best bet, if you really want to buy a timeshare, is to purchase a resale. Don’t get caught up in the idea that owning a “fee-simple” timeshare is the same thing as owning a piece of investment real estate. It’s not.