No examination of real estate investment would be complete without a discussion regarding timeshares. Let’s take a look and see if there are better alternatives.
What is a Timeshare?
A Timeshare is a method wherein an individual has the right to the use of a particular property for a specific period on an annual basis. Most timeshares are sold in increments of weeks and are priced accordingly. They are usually located in vacation resort areas or cultural centers.
Under a fixed week structure, the buyer will select a specific date and he then will be entitled to use the property for the week(s) that he has purchased from that specific date. No alterations are permitted.
If the timeshare offers flexible weeks, then the purchaser can usually select week(s) within a certain time period each year. For example, a buyer purchases 2 weeks at a beach resort for the high season period. He can select his 2 weeks for the period between December 1 and April 30.
Timeshare Exchange Programs
Some timeshares have a network of properties in various locations. The buyer can exchange his 2 weeks at one location for 2 weeks at another location provided that other members of the exchange are willing to do so.
In addition, there are independent exchanges. If your timeshare agreement allows it, you can register with one of these exchanges to trade your time period for a similar time period in another location.
There are two types of legal structures that govern timeshares;
1) Shared Deed Ownership Interest
With shared deed ownership, all purchasers of the timeshare own a percentage of the property based on the number of weeks purchased.
2) Shared Lease Ownership Interest
Under shared lease ownership, the developer retains ownership of the property. The buyer essentially purchases an extended lease which expires in a number of years. The buyer enters into a lease agreement that allows him the use of the property for a specific period. At the end of the extended lease agreement, the buyer has no further interest in the property.
In addition to the above structures, hybrids have been developed in recent years. For example, a developer builds an apartment hotel complex which he structures as a condominium. The units are priced at $300,000 and the purchaser makes a down payment of 20%. However, the buyer is restricted from using the property for a fixed period of time each year. The developer then rents out the property on a daily or weekly period for the rest of the year.
At the end of 25 years, the ownership reverts completely to the buyer. The advantage of this structure is that the purchaser makes no further payments and the developer is responsible for all operating expenses. This type of investment is best suited for individuals who are planning their retirement in a specific community.
Costs of Buying and Owning a Timeshare
First of all, you will need to have the cash to make the purchase as most banks are unwilling to finance timeshares. The other alternative is expensive financing from the developer. The cost of owning a timeshare does not stop with the purchase of the week(s).
The buyer is required to pay a maintenance fee on an annual basis. This maintenance fee covers the costs of the upkeep of the property. The maintenance fee is prorated based upon the number of weeks the buyer has purchased.
The biggest disadvantage is that the buyer has no control over the maintenance fee and it can rise substantially over the period of the timeshare. The maintenance fee must be paid regardless of whether the buyer uses the property or not.
Are Timeshares a Good Investment?
The investment value of a timeshare is highly dependent on the legal structure of the timeshare. If the timeshare is structured as a shared lease ownership interest, the value of that interest declines over time.
Even under a shared ownership interest, if that ownership interest expires after a specific number of years, it will also decline in value over time.
Why Would You Purchase a Timeshare?
Timeshares are ideally suited for people who vacation in the same location year after year. By purchasing a timeshare you are essentially locking in rental rates for the period of the timeshare.
Even though the maintenance fee may increase, the additional costs are likely to lag behind the increase in hotel rental rates over the same period.
A Better Alternative
If your objective is to earn a return on your investment while at the same time, enjoying an annual vacation in a specific location, there is a better alternative.
Short Term Rental (STR)
The best alternative is to purchase a property in the location of your choice. You can use it as a vacation property for however long you wish. For the rest of the year, it can be rented out on a daily or weekly basis.
At first glance, this might appear to be unmanageable, especially if the property is a significant distance away from where you live. This is not necessarily true.
You can hire a real estate broker or property management company that will manage the property in your absence. With services like Airbnb, it is relatively easy to market your vacation rental property. The key is to find a reputable broker or property management company to manage your property.
By owning the property outright, you have greater flexibility to use the property whenever you wish. There are no restrictions.
Timeshares are difficult to sell, even at a loss. If you own the entirety of the property, you can sell it whenever you wish.
As mentioned previously, timeshares tend to decline in value over time. If you have purchased a property outright in a desirable location, you are likely to enjoy capital appreciation over the long term.
4. Tax benefits
With a timeshare, there are no tax deductions for the costs you incur. If you own a vacation rental outright, you are able to not only write off all actual expenses, but you can take depreciation and amortization expenses as well.
The Bottom Line
For most investors, timeshares are not an attractive investment. There is one exception in favor of purchasing timeshares as an investment.
The resale market for timeshares is small. As such, timeshares sell for a significant discount relative to their original purchase price.
In some cases, where the timeshare agreement allows it, the timeshare can be sublet. If the timeshare can be purchased on the secondary market for a low enough price, a profit can be realized through the subletting process.
Timeshares are ideally suited to a small market, specifically those people who vacation in the same location year after year. For those buyers, timeshares can be a money saver over the long term. However, as a real estate investment vehicle, there are better alternatives.