Sherpa Report - DC cost per night

[Steamboat Bill]

Here is an excellent web site outlining the "cost per night" matrix that we have been promoting on TUG for a while.

http://www.sherpareport.com/destination-clubs/cost-per-night.html

Nick Copley suggests: There are a variety of ways to do this calculation, with no one "right" way. The way we've done it is to use 4 elements:

1. Annual dues
2. Non refundable portion of the initial fee
3. Nightly fee (if any)
4. Opportunity cost (on the initial fee)

There is even a spreadsheet that you can download to do the math for you.

Some interesting points:

1. I have never calculated the "immediate loss of 20% for a DC" into my cost per night and probably should have. Unfortunately, there is no way to predict how long you will be a member and the longer you are a member of a DC, the less impact the non-refundable portion of joining the club will be. Perhaps we shoudl adopt a 10 year plan to make things easy to compare.

For example, HCC charges $8,000 non-refundable deposit for Affiliate membership for 25 night per year. Thus, the cost over 10 years will be $32 per night.

2. HCC is still the best value for TUGers....Sherpa pegs the cost per night at $375. Especially compared to Exclusive Resorts at $2,084 per night or BelleHavens $1,177 per night

 

[travelguy]

High Country Club Private Membership cost per night

The downloaded spreadsheet shows the High Country Club Private Membership cost per night is only $297! That's the lowest cost of all DCs.

I have mixed feelings on using the Non refundable portion of the initial fee in the cost-per-night calcs. We don't add back a timeshare or fractionals depreciation, sales commission, closing costs, taxes, etc. to sell it when we discuss cost-per-night. I view the 20% portion of the membership fee as the cost of selling the unit back to the DC (and without the hassle of the selling process).

Also, the spreadsheet calcs the Opportunity Cost of money on the 20% non-refundable portion of the membership fee and also adds that same 20% non-refundable portion back to the cost-per-day expense. I believe the non-refundable portion can't be considered both "lost" and "cost"!

 

[Steamboat Bill]

Also, the spreadsheet calcs the Opportunity Cost of money on the 20% non-refundable portion of the membership fee and also adds that same 20% non-refundable portion back to the cost-per-day expense. I believe the non-refundable portion can't be considered both "lost" and "cost"!

I never thought about that and you are correct...I'm not sure how to correct this on the spreadsheet..thanks for your input.

 

[BocaBum99]

The primary reason for creating a model for daily cost for a form of accommodations is to enable you to create an apples to apples comparison to the alternatives. And, you can adjust the amount by whatever criteria you have for its key attributes. For instance, the Disney "Magic" has a very high value. You can model it in a way to estimate the cost of "Magic."

If you do not count the cost of capital or depreciation of the upfront cost, then you are artificially seeing a lower cost per day for your accommodations than you are actually paying.

For instance, in Bluegreen, if you have enough points, you can use points to pay all of your maintenance fees and annual due and still have points left to book accomodations.

If you don't factor in the cost of capital, then you could argue that that is a FREE timeshare. It clearly isn't.

A true financial model would factor in the upfront capital, or basis, of your timeshare or DC. Then, you estimate a reasonable use period. It could be 5, 10, 15 years. Then, you estimate the terminal value of that asset at the end of the planning period. You adjust all cash flows for inflation, assume an inflation rate on the maintenance fees and the underlying property values. Then, you do an NPV analysis and divide the cost by the number of nights in the period.

That is the best way to estimate your real cost per night.

I have found that timesharing is the best method for low cost per night. You buy a timeshare for below market value, you use the timeshare for that year and then you sell it for more than you bought it for about a year later. Not only are your accommodations free, but so are your airfare, meals, car and entertainment.

 

[PerryM]

Missing tabs?

** figured it out ***

 

[travelguy]

Better Quality. cost of Time, and Selling costs

I would add the following to the analysis of cost-per-night:

1) Similar to the premium paid for Disney "Magic", many of us multi-decade timeshare owners are looking for better QUALITY and larger accommodations. Enter Fractionals, Destination Clubs, Residence Clubs, etc. This complicates the cost-per-night comparison unless you compare by number of bedrooms, square foot, amenities, or similar. Better Quality accommodations was my primary reason for becoming a High Country Club member.

2) The timeshare system of buying, selling, trading, exchanging, renting and so forth has become way too TIME intensive for me. Juggling a portfolio of seven timeshares was becoming a part-time job. I charge clients a great amount of money for my time and don't consider it any less valuable for my personal use. I used to mentally write-off my timeshare juggling as a pleasant hobby but it's becoming more of a mental drag. Conversely, I can plan six and a half weeks of High Country Club use in about an hour a year due to the great availability of properties and efficient, online reservation system. I also don't have to "settle" for a secondary choice of properties or travel dates. My personal Time savings was a pleasant surprise to me when I joined High Country Club.

3) There is a lot made of the 20% non-refundable membership cost of DCs. IMHO, this is a glass-is-half-empty vs. glass-is-half-full view of this cost. I view this as an exit strategy from a DC purchase that allows a member to liquidate their membership without the issues associated with selling, collecting and closing a timeshare. Remember that my High Country Club membership is 6 1/2 weeks and that 20% non-refundable membership is amortized over the 6 1/2 weeks! Therefore an accurate comparison of the selling costs of a HCC Private membership to a timeshare week is only 3% of the original (not current) membership fee. This means no costs (monetary, time or energy costs) associated with listing, selling, collecting, closing and filing up to SIX TIMES! I'll pay that premium for the bulk sale of six and a half weeks at one time with no hassle! The total SELLING cost of timeshares MUST be included in any cost-per-night comparison if the non-refundable membership fee is included in the cost of a DC cost-per-night.

I don't know if all DCs, Fractionals and Residence Clubs have the advantages of better Quality properties, less Time to manage and no Selling costs as High Country Club, but these need to be quantified and added to any cost-per-night comparison to timeshares to have a truly accurate comparison

 

[Sherpa]

Travelguy, Here's the logic/thinking for doing the calculation the way we did it on the spreadsheet:

-Opportunity Cost. This is applied to the full (100%) member deposit since the DC has full use of this while you are a member. Put another way you are making a loan to the DC for 100% of this deposit. Your opportunity cost is a measure of what you could do with this money if you hadn't bought into the DC - so you could have invested (100%) of it in a money market account and be making 5+% or you could invest it more aggressively and be making more.

-The non-refundable portion of the deposit is very much a cost - it's money out of your pocket. Whether you view it as a closing cost, transfer cost etc it's still money you've spent.
Also we wanted to be able to compare the clubs between each other, and since some of the clubs give you back 100% of the deposit when you resign, they don't have this cost element. So we wanted to factor in this element for the clubs that only refund 80%.

Hope this clarifies the thinking for the calculation.

Cheers
Sherpa

 

[PerryM]

The real numbers...

Ok, let’s do the analysis from the investor’s side – the founders: (Will use HCC)

Buy $800,000 condo with 20% down = $160,000.

Finance the $600,000 at 7.25% for 30 years = $4,100 monthly mortgage = $49,200 per year.

Condo appreciates 7% per year in hot resort area, 10 years from now the condo is worth $1,470,700.

HCC Private membership fee is $50,000 with a MF of $8,400 per year per member.

Yearly the 8 members pay $67,200 in MFs which is enough to service the mortgage and keep the condo in tip top shape.

10 years later HCC sells the condo, and terminates the 8 member’s memberships – HCC makes 20% on the membership fee or $10,000 * 8 = $80,000, then there is the profit on the condo which is now worth $1,470,700. Assume a 5% real estate fee to sell it and HCC makes $1,397,000 – the remaining balance of $505,898 or $891,176 – the original 20% down of $160,000 = $731,176 profit + $80,000 = $811,176 on the initial investment of $160,000 = 406% return on their money in 10 years = 17% return on their money yearly.

They own the condo and can just keep this going for an additional 20 years and then cash in with all the profits.

Now these numbers could belong to the members if they start a Co-op; use the place and compound 17% each year to boot.

P.S.
In a Co-op, the 8 members only had to put up $20,000 each for that down payment.

P.P.S.
Let's all remember what is really happening here:

8 folks get together and buy another guy a beautiful condo and then pay him rent to use it.

Call me crazy, but this just doesn't fit into any investment scenarios I learned in B school.

 

[Steamboat Bill]

This thread is getting really interesting and this is why I love TUGbbs.

Some of my personal thoughts:

1. There will never be a 100% agreement on what represents the "true cost" of a DC as there are many variables that may be important to some people and not important to others.

2. I really like the model Sherpa is promoting as it appears to be the "fairest" from an objective point of view. However, they need to address the comments from Doug (travelguy) - "The spreadsheet calcs the Opportunity Cost of money on the 20% non-refundable portion of the membership fee and also adds that same 20% non-refundable portion back to the cost-per-day expense. I believe the non-refundable portion can't be considered both "lost" and "cost"!" and I look forward to their discussion of this issue.

3. I think Doug brings a perspective that I like (and personally agree with), but may not fit for everyone. Everyone here knows I joined HCC (like Doug) but I am an Affiliate member and Doug is a Private member. I may upgrade in the future, as I put a 3 year upgrade clause in my contract.

4. The cost per night would fit if all DC's and timeshares were equal….but they are not. Perhaps a better matrix would be: "cost per room per night" or "cost per square foot per night" or "cost per total guests possible per night" or "cost per quality" or some other combination. As you can see…this gets complicated and different people will like different models. That is why I kept it simple with my personal formula: lost opportunity cost of total purchase (5%) + annual dues / (divided by) total night if available use = cost per night. Yes, I did not include the non-refundable deposit, but this may or may not be a huge factor, depending on how you spin the numbers.

5. BocaBum99 suggestion "I have found that timesharing is the best method for low cost per night. You buy a timeshare for below market value, you use the timeshare for that year and then you sell it for more than you bought it for about a year later. Not only are your accommodations free, but so are your airfare, meals, car and entertainment"…is a fantastic idea IF you can pull it off….I have met him personally and he has SIGNIFICANTELY ABOVE AVERAGE timeshare skills that most people may not possess.

6. Doug's main reasons for joining HCC are the same as mine - Time savings and better quality - "The timeshare system of buying, selling, trading, exchanging, renting and so forth has become way too TIME intensive for me. Juggling a portfolio of seven timeshares was becoming a part-time job."

7. As much as I love timeshares…I currently enjoy DC's much better. Of course, there is nothing better than scoring a Four Seasons with a cheap trader, but this is harder for me due to the inflexibility of my vacations due to my kids school schedule. With HCC, I scored a NYC Times Square condo for New Year's Eve…awesome!

8. We must be MORE objective about timeshares: 95% of owners got ripped off by the developer, most owners do NOT trade up via II/RCI for prime time weeks or locations, the cost of II/RCI membership + exchanges fees and MF are rising faster than ever, you must invest a lot of time in order to beat the system (thanks TUG!). I really enjoy the hobby of TS and TUG and TS4M and DISboards, but if you want to compare DC's vs TS's….perhaps we need to consider time and energy spent in securing a trade as a commodity to be measured.

9. Currently I am taking the following approach to vacations: DC's as the yearly foundation for ease and quality and consistency of properties, TS for properties I really like and locations I want to visit regularly (and to maintain the potential of a great trade when I get lucky), VRBO for locations that I can't trade into, cash for cruises and hotel stays that don't fit into any category.

 

[Sherpa]

This thread is getting really interesting and this is why I love TUGbbs.

2. I really like the model Sherpa is promoting as it appears to be the "fairest" from an objective point of view. However, they need to address the comments from Doug (travelguy) - "The spreadsheet calcs the Opportunity Cost of money on the 20% non-refundable portion of the membership fee and also adds that same 20% non-refundable portion back to the cost-per-day expense. I believe the non-refundable portion can't be considered both "lost" and "cost"!" and I look forward to their discussion of this issue.

Here's another try at explaining the above. This split's out the calculation into 2 pieces, the first part is your actual cash inflows and outflows - the checks you write or receive, the second part is the opportunity cost. I'll use some example $ numbers :

1. If you join a club for (say) 10 years, with an initial fee of $90k that's 80% refundable and annual dues of $8k for 25 days usage, then your actual cash inflows and outflows will be:

outflows
10x annual dues 10x $8k =$80k
1 x membership deposit =$90k

inflows - at end of year 10
1x refundable portion of membership deposit = (80% x$90k) =$72k

So ignoring inflation and dues increases, over the 10 years you would have spent:
80+90-72 = $98k

and your cost per night would be $98,000/(25 x 10) =$392


2. Over the course of the 10 years you have been out of pocket for the full 100% of the membership deposit - you haven't had any of this cash. So you haven't had the "opportunity" to do anything else (eg invest) with 100% of this deposit.
So your opportunity cost is on the full 100%, because this is your lost opportunity, on the cash that you don't have the use of for 10 years.

[Or try thinking about it this way; instead of paying the 100% at the start of year 1 and then getting back 80% at the end of year 10, the club could have just asked you to pay 20% at the end of year 10. This would have the same effect for part 1 above, in that you'd pay $18k. But now you'd have the opportunity to invest your full (100%) $90k for all 10 years.]


In the spreadsheet we've compounded the opportunity cost over the 10 years. The spreadsheet also lets you change the membership period and the % opportunity cost and see what effect these have on the cost per night. Plus there are 42 different sets of number for different clubs or membership tiers within clubs and you can easily add other's if the specific membership tier you're looking at is not included.

Sherpa

 

[HeliumSF]

Online Cost-Per-Night Calculator

We agree that the math for the "opportunity cost" is confusing. A year ago, we built our cost-per-night Excel model as a tool to help readers compare the cost of destination clubs against other luxury travel options such as hotel suites.

Destination clubs hold your membership deposit until you resign from the club. As such, you're unable to use those funds towards other investments during the tenure of your membership. The intent of our Opportunity Cost calculation is to factor in potential investment gains that you give up when joining a destination club. For our model, we used a conservative 5% rate of return, similar to low-risk, long-term certificate of deposits.

Last Fall, we created an online cost-per-night calculator where you can change the assumptions (click here to use the calculator; see image, below). We published our methodology earlier in the year and emailed our analysis to hundreds of readers. Sherpa did a nice job adding the various pricing tiers to our spreadsheet to expand the cost-per-night model.

I've included an excerpt from our Decision Guide to Destination Clubs, as well, to help explain our analysis. Feel free to email us at helium@heliumreport.com for a copy of our model or to suggest improvements.

Regards,
Jamie Cheng
Co-founder, Helium Report

Cost-per-night Comparison - HELIUM REPORT Decision Guide to Destination Clubs (May 2006)

The chart below shows the Helium Report calculation of cost-per-night for each club. Since usage varies from member-to-member and some clubs offer “unlimited” plans, the calculations are standardized to thirty days of usage or the maximum number of days of the plan (if less than thirty days).

Membership deposit is amortized over ten years, less the refundable portion at today’s rates. We did not factor in any potential increase in fees and refunds at future rates, since future changes are not guaranteed.

The opportunity cost of capital is the potential cumulative interest on the deposit at a conservative 5% compound annual growth rate.

The cost per room is determined on an average of four bedrooms per home. Actual homes vary from location-to-location: typically four to five bedrooms in resort settings and two to three bedrooms in urban destinations.

We’ve intentionally simplified this example to provide a straightforward cost comparison to alternatives such as luxury hotels and rentals. It’s important to note that costs may be higher or lower per night depending on the number of actual days used. There is no one “right” model to determine cost per night.

The precise numbers shown in the table are subject to interpretation, depending on your assumptions. Of greater importance is the framework, which can help you more crisply assess your options. Toward that end, Helium Report makes this spreadsheet available at heliumreport.com.

 

[PerryM]

Is there an opportunity cost to lose in the first place?

Opportunity cost drives me crazy. By its very definition you have alternatives to what you are using it for. So what is the alternative to a vacation? A flat screen TV? Another car?

If you are going on vacation you want to stay somewhere – are you looking at comparing motels versus 5 star resorts? Is there really an alternative here to consider? I don’t think so. I can see buying a DC membership or timeshare or condo-hotel and then going right back to the same exact location via renting – but where is the lost opportunity here?

I leave out opportunity costs in anything having to do with vacations – there is NO alternative that I can compare the funds to. Perhaps someone can change my mind, but in 7 years of mulling over this topic I can’t see where it applies to vacations.

 

[HeliumSF]

Re: Opportunity Cost

I can see buying a DC membership or timeshare or condo-hotel and then going right back to the same exact location via renting – but where is the lost opportunity here?

Hi Perry,

Fair point re: a vacation or a flat screen TV. (Unfortunately, I haven't had time to enjoy either one!) In our Excel model, you can set the opportunity cost to 0 and omit that calculation. The average cost-per-night drops dramatically from ~$1,600 to less than $1,000.

To clarify, the lost opportunity is not what you could buy using the same money, but what you could earn from investing that money instead. We included opportunity cost because destination club membership deposits are sizable amounts - typically ranging from $200,000 to $450,000 - and the duration of membership may span several years. Our readers are often wondering whether it makes more sense to invest that money in a second home or another investment product and stay in hotel suites or rented villas instead. By factoring in the opportunity cost, you can get a sense for the potential gains you'd give up by putting that money towards a membership for an extended period of time.

Jamie Cheng
Helium Report

 

[PerryM]

The view as I see it...

<snip>
To clarify, the lost opportunity is not what you could buy using the same money, but what you could earn from investing that money instead.
<snip>

I understand what the person contemplating shelling out a large sum of money (well, to them it might be small) wants to do due diligence. I think a much better way to view this is as follows:

The family decides that $450k is to be moved from the stock portfolio to another portfolio – real estate, timeshares/fractionals, condo-hotels, or DCs. That should be the last time the idea of lost opportunity cost is mentioned. $450k in the stock market has averaged 13.2% since 1933. Real estate averages 5% during that same time (just a guess). The lost opportunity of watching the stock portfolio grow at 13% versus using real estate which grows at 5% is the only determining factor. That loss of 8% on $450k is $36k and after 25% taxes is $27k lost each year.

Is it worth $27k to spend multiple vacations per year in 5-star resorts or watch that $27k on the computer screen? Isn’t this the lost opportunity we are talking about?

What one does with $450k is another story – it can be used many ways:

1) Put in a “safe” investment and after taxes makes 5% = $22k per year to spend on renting villas

2) Buy a moderate 2BR condo or condo/hotel that will appreciate at 5% per year; MF of $18k per year

3) Buy a bunch of premium timeshares at $75k or 6 weeks of usage; MF of $8k per year

4) Buy a DC with an additional cost of 8% MF = $36k per year – NO real estate appreciation

You can add other items to the list but that $450k is going to be used in one way or another to generate vacations for the family. This is how I view lost opportunity costs – before the money is moved from stocks to other portfolios.

Trying to go further and make decisions has nothing to do with lost opportunity costs - those are already lost. Deciding how to best allocate that $450k is the next step in the analysis.

But, that's just my view of investments.

 

[Steamboat Bill]

I leave out opportunity costs in anything having to do with vacations – there is NO alternative that I can compare the funds to. Perhaps someone can change my mind, but in 7 years of mulling over this topic I can’t see where it applies to vacations.

This is one area that I must disagree with Perry as we are not talking about $100 or $200 where the lost opportunity in neglible.

Simply put...if you intend on buying a timeshare or joining a destination club, you might spend $20,000 -> $400,000 and these are large numbers.

If I didn't buy a timeshare or join a DC....I would have $20k-$400k in my bank earning me some type of passive income that I could use to pay cash for a vacation.

I like to use the example of trying to get a ski week in Park City during a prime time. I can stay at a hotel, condo, house, timeshare, destination club, etc.

I got tired of paying $4000 per week for a 1 bedroom condo, thus I bought a $30k 2 bedroom timeshare or I could use one of my destination club properties.

Ultimately, it works out better for me to buy than to rent.

 

[PerryM]

I'm lost in lost opportunities....

Let’s say that right now I could buy a great 1BR condo in Park City at the Silver King – cost $400k. Since I average 13% return on my investments that $400k no longer makes me $52k per year – my lost opportunity for buying that condo.

Funny thing is, I decided not to buy the 1BR and now I have a surplus of $52k – how does that help me last year – I never went on vacation? That’s what gets me about opportunity costs – I get richer and never take a vacation!

If you assume that vacations are desirable and will give up 3,000 shares of DIA (Diamond Trust – the DOW) in exchange for $400k of capital to maximize towards vacations – just where is the lost opportunity cost here?

I can see where the $400k will get me cheap vacations or luxurious ones – its up to how clever I am to use that money. Again, where does the lost opportunity impact me – I decided to convert 3,000 shares of a stock in a company that doesn’t exist (DIA is not a company but a basket of DOW stocks) to begin with for vacations with the family.

As I said, I can’t relate to lost opportunity costs once the decision has been made to take vacations – the alternative doesn’t really exist for me.