Everyone knows timeshares are a terrible investment. If you don’t believe it, ask Google. Here’s what I got when I did just that:
Not only does an authoritative source like Investopedia declare timeshares as a lousy investment, but have a look at the list of questions Google offers to answer for you based on the search question. Talk about negative!
And that advice would be sound if not for the fact I’ve been earning 10%+ cap rates on timeshares for over a decade.
Side Bar: What is a cap rate? Simply put, if I invest $10,000 and earn a net income on that investment of $1,000 per year, the cap rate on the investment is 10% of the capital required to invest ($10,000 x 0.10).
So what gives?
Well, this is a classic example of reality versus perception. Let me explain how I came to recognize the gap between these two by providing some backstory.
In my 20s, I took an interest in timeshares after my wife and I attended a pitch for one in Las Vegas for the Hilton Vacation Club. The facility was brand new, with a fantastic waterfall pool, accommodations much more spacious than a standard hotel room, and was within walking distance of great shops, restaurants, and entertainment. So we bought it…aaand canceled our purchase when we came to our senses a day later.
After sleeping on the decision, I realized I wanted to go to graduate school more, and while I liked what they were selling, I decided to put that off until another day.
Now, I have a saying I’ve adopted as one of my mantras: “Better lucky than good,” meaning no matter how good you are at doing something or making decisions, sometimes being lucky is better. In this case, my luck came from a desire to go to grad school. If not for that, I’d have let the three-day cancellation period pass and unwittingly made a bad investment.
When I got to work the next week, I relayed my experience to a coworker. It so happened he was an owner of a timeshare and told me it was a good thing I hadn’t purchased it “retail” since the same places were available for resale at HALF the cost or less. Talk about a lucky break!
Still, after being exposed to the idea, I liked the concept: Better accommodations, excellent locations, and the ability to trade them worldwide. After that, my wife and I embarked on an 11-year journey searching for the perfect timeshare property. We attended at least a dozen timeshare presentations - mainly because they gave you great free stuff for two hours of your time - but also because we wanted to understand the industry better. Every time, after showing us an amazing property and telling us how great our life could be if we’d just buy a share in this fabulous resort, we steeled ourselves against the temptation and offered a polite “No.” We said no in Cancun, Mexico, Newport Beach, Hawaii, Coronado, and many other great places!
I know what you’re thinking: “But didn’t you say timeshares are a good investment?”
I did, but not ALL timeshares, or even most timeshares. Eleven years of searching taught us a lot about what makes a timeshare attractive. We eventually decided to buy timeshares to use and rent out for a profit. Currently, we own 11 weeks of timeshare, use one week a year, and generate a tidy profit from renting the rest of them out. Our total investment in these properties has been less than $120,000, and they now collectively generate $13,000 or more in annual income, working out to a roughly 11% annual rate of return. Not bad for a “bad” investment.
I’m about to reveal the secrets of success I’ve learned from years of renting our timeshares at a profit. Here are the secrets in summary (in order of importance):
Location, location, location. This rule applies to all types of real estate.
Acquisition cost. How much will it cost to buy the timeshare?
Delta Between Rental Rates and Maintenance Fees. Is there meat on the bone?
Fixed Unit. Buy rights to the same unit year in and year out.
Fixed Week. Buy rights to the same week(s) year in and year out.
Last Remodel. How current is the resort in general and the unit in particular?
Contingent factors. Is there a special event nearby that attracts more potential guests for the week or weeks?
That’s it in a nutshell, but let’s elaborate on each point.
Location, Location, Location
If you are going to rent or use a timeshare, you want it to be someplace you and other people want to go. For summertime fun, the highest-demand locations will be at the beach. Hawaii and California are trendy vacation spots when things warm up. In California, this can include the beach and some mountain destinations like Lake Tahoe and Big Bear Lake. For cold weather, timeshare resorts close to the best skiing will be more in demand. Other special-interest locations, like Napa, may have a steady customer base all year round. Beware that not all destinations are created equal. In my experience, the best bets are beachside (or very close by) resorts in the summertime.
Acquisition Cost
What you pay for a week or weeks of timeshare matters when looking at it as an investment. You could scour single-family real estate deals for months in Hawaii and California and not encounter a single deal that returns a 10% cap rate, but in timeshare, believe it or not, that’s not as difficult to find.
You may ask why that is. Two reasons: (1) the gap between reality and perception - most people don’t look for such deals, assuming they don’t exist, and (2) for the more savvy investors, these are small potatoes not worth their time. One of the reasons I don’t own 100 weeks of timeshare is that I’ve moved on to larger deals that generate similar profits with fewer locations to manage. The downside to larger deals is that they are usually capital intensive. Still, early in my real estate investing career, timeshares were great bite-sized investment opportunities to incrementally increase my income and give us more options on places to vacation on a rotating basis.
What is the Delta?
You cannot profit in timeshare if you can’t rent the unit for more than your combined maintenance fees, taxes, and advertising costs. If there isn’t a delta between revenues and expenses, no money will be made.
Different resorts cater to varying clientele. Those offering luxury amenities and high service can have maintenance fees exceeding $2,000 per week. More typically, a well-run resort offering moderate amenities will charge maintenance fees of $1,100 to $1,400 per week of use.
When you invest in a higher-end resort with more luxury amenities, you will rent to a smaller pool of vacationers who want high-end services. Often buyers of timeshares like this fall in love with the high service, but these same buyers can later tire of the high fees that go with it. So the supply of weeks for rent at these resorts tends to be higher than demand, making it harder to bake a profit into the rental of the timeshare to others. Case in point, the Four Seasons in Carlsbad, CA:
On the far left column, notice the annual maintenance fees (in parenthesis) ranging from $2,398 to $2,820. That’s a lot of dough. Also note how all of these weeks for sale are floating, which means you have to request a reservation for a given week, and if it is available, you get it, but during higher demand times, you might not. Here there are no guarantees on what you can offer prospective renters from one year to the next. Take note of how inexpensive these weeks for sale are at a luxury Four Seasons resort! There’s a reason for that: No delta:
Pay special attention to the greyed-out lines. These are the deals that got done,; it looks like $2,500 per week is the winning number. That means the owners of those units are barely breaking even or losing money for every week of timeshare they rent to others.
Now let’s look at a second case study. A popular mid to high-range Hawaiian resort, the Westin Kaanapali Ocean Villas resort on Maui:
Here we see a selection of fixed week units for sale and notice they are all prime (for Hawaii) weeks, including the Christmas to New Year break (weeks 51 and 52, which vary by timeshare calendar year). First, let’s note the fees: $2,245 to $2,692 per week (I suspect the $3,649 is an unfortunate typo based on it being much higher than the others without explanation). Notice also how much higher the sale prices are for these weeks. As you’ll see in the following image, there is a reason for that.
Above are the weekly rental rates being sought and agreed to (in the greyed-out lines). Notice the weekly rentals are getting done between $3,000 and $4,100. With the maintenance fees being well below these amounts, there is a financial gain in most cases. Assuming $150 for advertising and contract costs (this is roughly the cost on RedWeek - my preferred platform to advertise my timeshares), the average one bedroom total costs are $2,395. If I rent the unit for $4,000, my profit is $1,605. If I’ve paid $35,000 for the unit, my annual cap rate equals $1,605/$35,000 = 4.5%. Not the 10% cap rate I would require to buy it as an investment, but better than the return at a bank, and when you want to take a nice Christmas vacation in Hawaii, it’s there for the taking every year!
I mentioned buying timeshares yielding 10% or better. I’m not inclined to give away my favorite resorts for finding this type of return since I still am on the hunt for a timeshare investing opportunity or two ; ) , but I will say the deals are out there if you look. The other considerations I’m about to discuss can help you narrow the field to the best investing opportunities.
Buy Fixed Unit TImesahres
This issue comes down to knowing precisely what you have to sell to prospective renters each year. I favor first-floor, interior (to the resort center) units since these appeal to families and people with mobility issues and ensure my units have a nice view of gardens or a pool instead of the street traffic noise. Some prefer higher floors with ocean views. Just know ocean view units fetch higher resale prices but may not necesarily deliver higher rents than the units I have historically invested in.
If you do not buy a fixed unit, you will be subject to the resort management as they try to satisfy as many requests from resort owners as they can. Almost everyone wants an ocean view if they can get it. The only way you can be sure to offer that is to buy a fixed-unit timeshare with an ocean view.
Buying fixed-unit will narrow the field since more timeshare facilities are floating-unit, meaning your unit will vary from year to year. If you know that every unit at the resort offers a similar view or experience, having a fixed unit may not be as critical, but the room placement matters at most resorts.
Buy Fixed Week Timeshares
This criterion will further narrow the field of potential facilities where you might want to buy a timeshare. Most timeshare resorts offer floating week units, so you can’t be sure what week you will have to offer (or use) until you’ve made a request and the resort management has confirmed what is available.
Sometimes the floating week is tightly constrained to ensure you get preferred weeks. For summer, the best weeks are Memorial Day through Labor Day. If the rules applying to the unit guarantee you will get this narrowly defined set of weeks, a floating week unit can be an option. However, if you can get a unit that is usually the 4th of July week, I promise you will consistently see higher rents for that unit than one that floats between Memorial Day and Labor Day.
Fixed-unit, fixed-week timeshares have an inherent advantage (or disadvantage) when you buy them. An ocean-view, 4th of July week unit will fetch an excellent rental rate every year. A street-view, mid-March week unit is unlikely to ever make a profit above and beyond the maintenance fees.
When Was the Resort Last Remodeled?
This is an issue you cannot escape altogether. When you become a real estate investor there will be a frequency of not more than 20 years and not less than 7 when the property must be remodeled. When a property needs a remodel, and you know one is scheduled sometime soon, it can be an excellent time to buy a unit at an extra discount.
This is why: Remodels often require additional capital fundraising, so the usual maintenance fee is temporarily increased to raise the money for the improvements. Timeshare owners who haven’t successfully monetized their ownership may want to sell to avoid getting tagged with these additional fees. The downside in buying a unit at a resort about to remodel is that you may be the one chipping in the extra money, but if you have to pay an additional $500 for one year but can buy the unit for $5,000 less than it might normally go for, it makes sense to take the one year hit for the discount price. It will improve your long-term performance in the investment as rents improve after the work is complete.
Avoid buying a unit at a run-down resort. It may not be merely a matter of needing a remodel. It may be a poorly managed resort. My rule for buying real estate is this: I only buy a property I’d like to live in or stay at. Some take a different approach since being a slum lord can be profitable, but I can’t be that and keep my conscience clear. In the same way you have to decide what your risk tolerance is; you must decide how your conscience drives your investing decisions.
Contingent Factors
Sometimes a resort is especially popular during a specific week or time of year. For example, there may be a famous festival, art show, or luxury car show in a given week each year that draws lots of out-of-towners. This can drive your rental rates up dramatically, depending on the supply-demand metrics of the event.
A certain attraction might be open for the season, like horse racing or the county fair. These can potentially draw more overnight visitors to the area too. Be attentive to the historical rates in these specific weeks to see if there is more potential for profit. Regardless of the week, maintenance fees tend to be the same based on the size of a unit, no matter the week.
Other Considerations
My wife and I wanted to own timeshares located where we could use them without incurring the cost of airfare. For this reason, I’ve steered clear of investing in Hawaii timeshares, even though they are very popular.
We always allow for the possibility of wanting to stay in any of the units we’ve invested in, so they need to be desirable for our use. One of our timeshares is a massive three-bedroom, four-bath penthouse that sleeps 12 people in a trendy resort destination. Others are one-bedroom, one-bath units that sleep four or six. I like family-friendly units, so I never invest in one with an occupancy of fewer than four people. Two-person occupancy units will significantly reduce the number of potential renters for your unit. They may be less expensive to acquire, but there is a reason.
Be aware some timeshares, like those offered by Disney, are not deeded property owned by the buyer in perpetuity. They are limited to a certain number of years and lose resale value as each next year is used. I would recommend avoiding this type of timeshare altogether as an investment to make money. You want a deeded property that belongs to you as long as the resort exists.
With deeded property, you will pay property tax, just like you may on your own home, so be sure to factor that expense into your overall return calculations. These taxes vary by state, so be sure you’ve figured out what those costs are before signing on the dotted line to buy a unit.
I’d also recommend paying cash for the unit. If you don’t have the cash, I’d argue you shouldn’t be buying the unit.
My favorite source for vetting a timeshare for investment is RedWeek.com. They offer detailed metrics on historical rents and unit prices, and break these down by week. The following is an example of the data they provide:
Notice how the prices of the units successfully rented (the green dots) peak from mid-December to early January. Since maintenance fees are the same year-round, I’d look for units for sale in this timeframe to maximize my profitability.
The cost of advertising on RedWeek is low (less than $100 per post) and they offer options to handle the entire contract and exchange of funds for a bit more.
Closing Remarks
Gaining specialized knowledge in timeshares can help you break through the perception is reality mythos and make a few of the best worst investments in real estate you may ever find.
This is just one example in the world of real estate, and one you can dabble in with more limited funds, say $10-15 thousand to buy the unit for cash, instead of waiting to build up $100,000 or more to get started and still needing to procure a loan.
Everyone likes to vacation, and if you can profit from it, so much the better!
Until next time, may peace and prosperity be with you.
The Natural Economist
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