Hi Brian,
I am dropping you a note after reading the financial analysis
of the Disney Vacation Club I read on Mouseplanet.com written
by Robin Beal and David Luner. I would like to start off by commending
you and the others at MousePlanet for a simply remarkable website.
I wish I had found it sooner than I did.
The financial analysis however stood out to me because I did
my own thorough analysis several years ago in hopes of finding
an economic justification for buying into the plan. I am a huge
Disney fan and love the resorts (I'm currently planning a trip
to OKWR, I'll be renting the points from a DVC member), but the
numbers just didn't justify buying into the club.
Needless to say, I was surprised to see a mathematical study
that actually came to the conclusion that membership in the club
made sense strictly from an economic standpoint. But after looking
over the numbers in the article, I found two issues that I thought
I should bring to your attention.
Firstly, you cannot adjust a long term return of 10% in the stock
market for taxes on an *annual* basis because you don't pay taxes
annually. You only pay taxes upon selling the securities. If you
are comparing two 45 year investments, then presumably you wouldn't
pay any taxes on your stock investments until after 45 years.
In other words, your money grows at 10%, not 6.5%.
Secondly, long term capital gains are taxed at 20% (with a real
possibility of going to zero % with current proposals in Washington),
not the marginal tax rate of 35%.
Anyhow, when you run the numbers through again, the effects are
dramatic. Where Robin and David calculate "*lost* income
on principal" to be $55,676; the actual number is $199,992
(gains on $13,150 at 10% for 45 years minus 20% cap gains tax
discounted back at 3% assumed inflation). Such is the miracle
of compound interest when you go 45 years at 10% instead of 6.5%.
The math from here on out is really a moot point.
Of course you may never get 10% over 45 years in the stock market
(but you could also do better) and you would almost certainly
sell some stocks along the way to buy others, paying some taxes
along the way. Also, room rate inflation may be higher that 8%
and actual inflation may outpace maintenance increases. If you
massage all these numbers you pretty much can come up with whatever
answer you wish. But when I put in all the numbers that *I* thought
were realistic (and believe me, my wife and I were looking for
any excuse possible to join in), it just didn't add up for me.
I especially don't see room rate increases continuing at 8% and
that is the key. You will get those 8% jumps when the economy
is booming, but you will have flat years and heavy room rate discounts
when the economy is slow. And as Disney continues to sell more
memberships, it appears there will be a steady supply of members
looking to rent unused points, giving non-members a chance to
stay at those awesome resorts at a fraction of Disney's advertised
rental rates.
Anyhow, I didn't mean for this to get so long, thanks for reading
this far and happy vacationing to us all no matter how we pay
for them!!!
Hi Brian,
Sorry it has taken me so long to respond but I've been in heated
debate with a friend of mine who disagreed with my methodology
and I've come to the conclusion that he is correct :( Actually
it's good news for those looking to get into DVC!
As I previously wrote, subtracting taxes annually on a long term
investment greatly understates the actual return on such an investment.
By using the marginal tax rate (35%) as opposed to the long term
capital gains tax rate (20%), you compound that error several-fold.
However, as I (as well as Robin Beal and David Luner) might argue
over how to calculate the return on investment that is lost by
buying into DVC, the real issue is whether or not to include such
a calculation at all.
The logic is, if you buy into DVC you are paying cash up front
for accommodations in the future instead of investing the money
today and just paying for your vacations as you go. This is certainly
the case in the early years after buying into DVC, but every year
you pay DVC dues instead of cash for a vacation (in which case
the dues are much less then the cash cost of WDW accommodations),
this "investment" decreases. An example will clarify
this point...
Using Robin and David's numbers, the up front cash cost of joining
DVC is $13,150. If invested instead of spent on DVC, this amount
would have grown to $14,005 after one year (at 6.5%, $13,150 X
1.065=$14,005). The investment would grow by another 6.5% after
year two, to $14,915 ($14,005 X 1.065), and so on...
But here is the problem... after one year the DVC member pays
dues of $702 whereas the non-DVC member must pay for a hotel.
Using a more reasonable comparison (I think we would all agree
that the All-Star Resorts are no comparison to a DVC studio) of
ten days in a moderate on sale (still being too generous but it
allows the point to be made) at $150 per night. The non-DVC member
must pay $1,500 in hotel rent which is more than twice the DVC
members dues, at a difference of $798 (which incidentally will
increase every year that hotel price increases outpace dues increases).
Now, back to the investment analysis. After one year we got to
$14,005. But now we must decrease this number by the difference
between the year one DVC dues and year one hotel costs, $798,
before calculating the investment balance for the start of year
two. So after two years, instead of having an investment worth
$14,915, you really only have $14,065 [($14,005 - $798) X 1.065
= $14,065] Now, before calculating the return for year three we
must reduce this amount again by the difference between year two
DVC dues and year two hotel costs (at this point the investment
begins to go down instead of up). This goes on until the investment
balance runs down to zero and eventually it is the DVC member
with extra funds to invest at an increasing rate every year so
long as DVC dues are lower than equivalent hotel costs. I have
played around with the numbers and it is difficult to get the
original $13,150 to last more than 8-10 years.
Anyhow, there is an easier way. All you need to do is take the
present value of all vacation accommodation spending under the
two different scenarios (join DVC or pay cash as you go for accommodations),
and compare them to each other. In this case you get the same
end result although the break-even point is shorter (this is due
to the fact that most of us would use an investment return rate
higher that the inflation (discount rate), if you set the after
tax investment return to the inflation rate the two methods return
identical results).
The bottom line is this... it is true that you have more money
to invest in the markets up front by not joining DVC, but it is
also true that if you don't join DVC you have less money every
year for 40+ years by paying cash for hotels instead of DVC dues.
Using reasonable estimates for inflation, market return, hotel
inflation, dues inflation...etc., you will miss out on investment
return in the early years but make it all back and much more in
the later years by joining DVC. Of course this is strictly a financial
analysis and assumes that you are visiting WDW on a regular basis
and staying in like accommodations. It also assumes that you do
not waste points in any way by letting them expire, staying disproportionately
on weekends, or trading them for stays at non DVC resorts (even
trading them for other WDW hotels will significantly negatively
alter the analysis).
So that's it. I'm sorry it turned out that I agree with the overall
conclusions of your previous analysts, I know you were looking
for some counterpoints for balance. The DVC is not a cheap timeshare
system, that's for sure. But if you're going to WDW on a regular
basis anyhow and staying in mid-level or higher on sight hotels
(and plan to indefinitely), you will save a lot of money by joining
DVC, so long as you use the points system wisely.
Thanks for giving me the opportunity to sound off, and thanks
again for the great web-site.
