We bought into DVC in 1997 with a purchase of 230 points via
a resale. Before purchasing, we needed to convince ourselves that
it wasn't a totally dumb move financially. Our goal was to determine
how much we were really paying for the vacation club, over the
45 years of the lease, in 1997 dollars. All percentages used in
our calculations are only best guesses. YMMV and caveat exemptor.
This posting is not being made for the purpose of soliciting an
interest in real property. We are not licensed by the State of
Florida for anything. :-).
(A) Let's start out with the money spent in 1997. We paid in
cash, which makes this part easier.
| Cost of 230 points (resaler
price) |
$12,600 |
| Closing Costs |
$500 |
| Total |
$13,100 (1997
$$) |
Next, since we are pre-paying for 45 years of a timeshare,
we wanted to know how much the $13,150 would earn if we *didn't*
buy the timeshare, but instead invested the money in the stock
market. This is the amount of money "lost" by spending
the principal and not investing it. We guesstimate that we would
make an average of 10% in the stock market between now and 2042.
Next we have to adjust that by our marginal tax rate (fed&state)
of 35% which brings the real earnings, after taxes to 6.5%.
Income from an investment of $13,150 compounded at 6.5% for
45 years is $210,596.00 in "2042 dollars".
So, if we had invested the $13,150 at 6.5% interest, then in
2042 we would have an extra $210,596 in the bank. BUT, that's
in 2042 dollars, not 1997 dollars. I want to base everything
on 1997 dollars, so I need to adjust for inflation between now
and then. We picked a 3% inflation rate. Technically, this is
your "cost of money" or your "discount rate".
(B) The value of the interest on $13,150 at 6.5% for 45 years
adjusted for a 3% "cost of money/discount rate/inflation"
in 1997 dollars:: $55,676.
Next, we needed to add in maintenance costs for the next 45
years. To make things easier, we picked the annual maintenance
increase to be 3%, the same as inflation.
(C) Total maintenance for 45 years in 1997 dollars: $31,601
So, to get our total cost for DVC in 1997 dollars, we add up
(A), (B) and (C):
Total cost of points: $13,150 "Lost" income on principal:
$55,676 Maintenance 1997-2042: $31,601
(D) Total cost in 1997 dollars: $100,427
Hmmm. Looks pretty scary, doesn't it?
Now, we needed to compare it to something. We had previously
stayed at the All-Start Music when visiting WDW. We used that
as a baseline rather than, say, the Day's Inn at Olde Towne
:-). This is also the least expensive on-site resort.
We looked at the DVC points charts and determined a "worst
case senario" for spending the 230 points on a Studio.
In Premier season 230 points buys 9 nights (including 4 weekend
days) at OKW in a Studio. Compare this to 9 days at ASM (in
1997) at $79.00 per night plus 11% tax: $789.21.
Next, we needed to calculate how much the rate at the ASM would
increase each year. We read somewhere that hotel rates increase
an average of 8% per year. This is consistent based on what
we've seen for the change in MKC rates at ASM for the past couple
years. So, we calculated how much it would cost to stay at the
ASM for 9 days per year between 1997 and 2042 given a yearly
increase of 8%. Again, we adjusted for 3% inflation so we could
compare 1997 dollars with 1997 dollars.
(E) Cost of 9 days at ASM from 1997 to 2042, adjusted for 8%
annual increase in hotel prices and 3% inflation in 1997 dollars:
$117,450.
So, if we compare the total cost of DVC in 1997 dollars ($100,427)
with the total cost of staying at ASM for a single week ($117,450)
for a week every year, it is slightly better to buy DVC than
stay at ASM (if you happen to have $13K laying around like we
did; borrowing the money changes the picture). Since we pulled
the following percentages out of the air: 10% return on investment
before taxes (ROI), 3% cost of money/discount rate/inflation,
3% increase on maintenance and 8% increase on hotel rates, your
mileage may vary. The overriding factor seems to be the increase
in the cost of hotel accommodations.
Now, we all know that 230 points can normally buy a lot more
than 9 days at OKW. In fact, it can buy a studio for 20 days
in Adventure season, 19 days in Choice, 16 days in Dream, and
14 days in Magic. We also know that a studio in OKW is a whole
lot nicer than a room at ASM. What really pushed us over the
edge into buying into DVC was the flexibility of using the points.
If we didn't want to stay at DVC one year, we could trade our
points for a full week somewhere wonderful in a 1 bedroom. Part
of the evaluation is admitting that you are "upgrading"
the level of your vacation -- no more Day's Inn and no more
hunting around for "the best deal". As far as we're
concerned, we're getting filet mignon for the price of hamburger
(well, maybe a good NY Strip).
-- Robin & David
Be aware that there are no return links, but if you want a copy
of our spreadsheet, it’s available in Lotus 123 format at http://www.mailbag.com/users/robinb/dvccomp.WK4
and in Excel format at http://www.mailbag.com/users/robinb/dvccomp.XLS.
