Hmmmm, what to do...

Travel bulletin boards often have people asking questions about buying or not buying a timeshare. I have read mostly poor discussions on the subject and thought I would add my thoughts for those who may want a concise, but correct method of analysis.

Timeshare Purchase or Rent Analysis

Purchasing a timeshare requires a partly financial and partly lifestyle analysis. I don't claim to be an expert on people's lifestyles but I do have a facility with financial analysis. Below I summarize my views on purchasing a deeded timeshare. In deeded timeshares you own the unit in perpetuity for a specific week each year. With other arrangements you own a certain number of weeks, 20 for example, and when you have used them you are history. Or you may have the same week each year for 20 years. Flex time weeks may give you the right to a week per year but the specific week has to be reserved each year. This analysis doesn't apply to these types of arrangements, but they also can be modeled. They are often sold to the unwary with the pitch that you can swap them for weeks at other desirable resorts. Don't count on getting what you want or when you want it, through an exchange program. Aspen may be great in the winter, but in May you gotta like mud. Buy what you are buying only because you want to be there at that time.

Purchasing a deeded timeshare is a lifestyle commitment. The resort and the dates have to fit your life. (Your kids' spring break in Aruba for instance.) Don't depend on swapping dates or resorts. It may work out well and then again it may not, but you can't tell how it will work out when you buy. You have to want to stay at the resort. This means you must like the place and the people. Chances are if you really like it other people will also and it will be easier to sell or trade.

Once these decisions are made, the financial analysis is simple. The main elements are:

1. What is the cost of the deeded timeshare? In this example I assume $5,000 per week.
2. What is the annual maintenance per week? In this example I assume $375.
3. What would it cost to rent an equivalent place at that time of year? In this example I assume $175 per night or $1,050 per week.
4. What is your tax bracket? In this case I assume 39%. Your tax bracket is relevant because when you own a timeshare you save the difference between the maintenance charge and the cost of renting. Since you don't pay a tax on this savings it is the equivalent of a tax free yield on the money you spent to buy the timeshare. In the above example $1,050 weekly rent less the $375 maintenance fee is a savings of $675. Before tax adjustment this is a yield of 15.5%.

However if you are in the 39% tax bracket you have to divide the $775 savings by 1 - 0.39, or 0.61. The result is a pre-tax equivalent savings of $1,270.49.

Another way to look at it, is that you would have to earn $1,240.79 to have $775 leftover after paying 39% in taxes. $1,240.79 is a yield of $25.41% pre-tax savings per year for the rest of your life on the $5,000 investment. And you get to congratulate yourself for such an astute decision while sitting on the beach, sipping a beer and watching the sun set over the ocean, in front of your timeshare.

A few considerations.

• You have to do the math for yourself using the inputs relevant for your specific situation.
• I am not selling you anything, so if you buy or not, it is your own business and I have no responsibility whatsoever. (See below for the sole exception.)
• Maintenance costs do go up, but so do hotel room rates. While they may go up by the same percentage, the actual dollar amount per week is generally a lot less for the timeshare. The numbers should get better over time for a well run and well maintained timeshare in a good resort location.
• Selling a timeshare is not real easy. You have to find someone who likes it and wants it for that specific week. Clearly the major holiday, school vacation weeks and special events are in more demand. They are also higher priced.
• A place that people can also fly directly into from major cities and on more than one carrier is a help.
• Resorts that are in politically stable countries and out of the way of natural disasters such as hurricanes, severe beach erosion and volcanoes are a plus for you and potential future buyers.
• There is generally a shortage of two bedroom and larger units. As the population ages you will find parents and grandparents will want to take the kids away with them. Hotel suites are really expensive and most timeshares are largely studios and one bedrooms (each with a sleep sofa in the living room.) There will be greater demand for larger units in the future. If you need a larger unit, but could cram into a smaller one, buy the larger one.
• You can sometimes find a resale at a bargain price. Try to go directly to the owner. Commissions often run up to 25% at the timeshare's resale office. You can save this amount.