Why Are Timeshares “Bad Investments”? Everything You Need to Know
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Summary:
Timeshares are sometimes considered a bad investment because they’re illiquid assets that require annual maintenance fees and can potentially cost much more than they’re worth. Additionally, some people may feel that they are being pressured or misled by timeshare salespeople or that the terms of their timeshare contract are not transparent or fair. In many cases, buying a vacation home or using the money toward staying at hotels or rentals offers better value than investing in timeshares. However, there are plenty of people who love the advantages that come with timeshares.
Timeshares are a vacation package concept that has been around in the United States since the late 60s and early 70s. The buyer or “investor” of a timeshare pays a lump sum fee to acquire that timeshare. Timeshare contracts then enable the investor to use that timeshare for a certain amount of days or weeks during the year.
Many people think of a timeshare as partial ownership of a vacation property — however, this term must be clarified. A timeshare does not have equity in the underlying asset. Instead, it gives you a slice of the overall timeshare package. So what does this mean for timeshare owners?
Keep reading to learn more about the timeshare industry, how a timeshare operates, and why these operations make timeshares bad investments.
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Timeshares 101
Timeshares and timeshare resorts were first brought to the U.S. market in 1965. Since then, the market has ballooned to over $100 billion in annual revenue. You may have even participated in a timeshare presentation, many of which are offered in exchange for waterpark tickets, free breakfasts, and other incentives.
The idea behind timeshares was to have people commit to going on holiday somewhere they love, saving on costs, and eventually being able to sell the timeshare off, ideally for a profit. A typical run-of-the-mill timeshare will have three features: a lump-sum payment, a timeframe to use the property, and maintenance fees.
1. Lump sum payment
This is when you are “buying” the timeshare. According to the American Resort Development Association (ARDA), the average timeshare price for a one-week timeshare is $24,140.
It’s pretty easy to do some math with this one. If you multiply $24,140 by 52 weeks, you get $1,255,280. This is the entire annual value of the timeshare package. However, is the underlying asset of a $24,140-per-week timeshare package really worth $1,255,280? Most of the time, the answer to this question is most definitely no.
IMPORTANT! In some cases, timeshares can be financed with a mortgage, just like you would get to purchase a property. If you have a timeshare andequity in your home, it might be wise to get a home equity line of credit (HELOC) and pay off that timeshare debt. Here are some options for you to choose from.
2. Timeframe of usage per year
With a timeshare, what you’re really buying is the number of days to use the property. This could range from one week to a month or more, depending on how your timeshare package is structured. This is your period of time to use it every year and, ideally, if you can’t make those dates, you can trade with someone else who has a similar timeshare.
This is called “banking” your week to exchange for another. Depending on the timeshare company you work with, you may have a “floating week” in which you have more flexibility for your week to spend. But many times, this won’t be available in the high seasons when everyone wants to use it.
3. Maintenance fee
Timeshares will also require upkeep every year once the lump sum has been paid to buy the timeshare. This will usually require the timeshare owner to pay maintenance fees.
The ARDA says maintenance fees will range from $640 to $1,290 annually. You’re on the hook to pay a maintenance fee as long as you own the timeshare property, even if you aren’t using it.
Why are timeshares bad investments?
From an investment-only perspective, there are several risks and downsides to timeshares. Not only are they expensive and illiquid assets, but they can also depreciate in value quickly.
Difficult to exit
Any investment needs to have an exit strategy, or the ability to exit the investment and recoup the money that was invested, ideally with a profit. This is the case of both investments in the stock market or even in larger assets like a house.
However, timeshare units are notoriously difficult to resell, which timeshare salespeople tend to leave out of their presentations. As new timeshares are constantly becoming available, the older ones flood the resale market and, in many cases, lose value. This results in resale values that are lower than what it was purchased for.
In the investment world, this means a timeshare is a very illiquid asset, which isn’t a good trait for any investment.
High maintenance fees
Maintenance fees need to be paid every year and could increase. This annual fee needs to be paid regardless of whether you use the timeshare or not. If your timeshare has an adjustable percentage instead of flat-fee maintenance, this can get expensive.
Think of it as an HOA that is completely out of your control. If your fees increase a substantial amount, it’s very difficult to fight this price hike.
Value depreciation
Timeshares tend to depreciate in value quicker than most things. The timeshare that you paid $20,000 for in 2015 can possibly only resell for $10,000 in 2022. Think of a timeshare as a huge car that routinely needs maintenance work even though you only drive it one week out of the year.
Of course, there are cases where the timeshare could increase in value, especially if it’s in an area that is drastically undersupplied and doesn’t allow for very much new construction. However, in most cases, the value of the timeshare on resale will be less than the value that was paid for it.
Shared lease ownership or fractional ownership
Most timeshares fall under what is called a shared lease ownership asset. This means that the investor is not buying any part of the underlying asset, but is instead buying a leased interest in the property, while the developer retains the actual deed or title. These shares of a lease are incredibly hard to resell and depreciate the quickest. Due to this factor, shared deed ownership timeshares are less expensive than traditional ownership timeshares.
A shared deed ownership structure, more commonly known as fractional ownership, gives the timeshare investor an actual slice of the title of the property. This means that if the underlying property appreciates, the fractional share of ownership should, in theory, increase in tandem.
However, it’s important to note here that all the owners of the underlying asset need to agree to sell the property in order to take full advantage of what the market price may be. If not, the fraction of equity will need to be sold on the resale market to deliver the investor an exit strategy. Again, due to the massive timeshare resale market, the value achieved might not be equal to the value achieved if the whole property was sold on the market in one piece.
Are there advantages to timeshare ownership?
The timeshare industry is a $100 billion industry for a reason, and that’s because it does offer some benefits. Here are some of the benefits of timeshare ownership, that many timeshare owners will attest to.
- Financial accessibility. Buying a vacation home in a sought-after tourist destination can be expensive. Timeshare properties allow people who would never be able to afford a vacation home at an expensive location an opportunity to stay in a premium vacation home for a fraction of the price.
- Preplanned holidays. Sometimes planning can be a nightmare, particularly if you’re looking at visiting places in the high season. A set time to go on holiday every year can allow everyone to organize their schedules on a yearly basis with minimal surprises.
- No maintenance. Timeshare companies will take care of all of the maintenance, which will be part of your maintenance fees that are paid on a yearly basis. This allows them to cover the maintenance of pretty much everything associated with the property and its amenities, while the investor is completely hands-off.
Pro Tip
Not worrying about maintenance can be a huge draw for some timeshare owners. This can be particularly useful if you own timeshare properties in a foreign country where you don’t speak the language. If your timeshare is Seminyak, Bali, for instance, unless you know electricians, plumbers, and maintenance people who can speak fluent English and Indonesian too, this can be a pain.
Alternatives to timeshares
With those benefits in mind, let’s look at some alternative uses for your money. While you may not get the same benefits of timeshare resorts, these alternatives will likely give you more bang for your buck.
- Vacation homes. While timeshares can be considered vacation homes, purchasing a second property to use as a vacation house is a better use of your money. Not only will you earn equity in your house as you pay it off, but you can also offer the property on Airbnb or other websites as a rental unit when you’re not using it.
- Hotel reward credit cards. Hotels may not offer the same space as timeshares, but they do offer plenty of other benefits. For instance, you don’t have to pay maintenance fees, and you only pay for the time you’re actually using the hotel rooms. Most hotels also partner with credit cards to offer discounts or rewards points, making your stay even cheaper.
Like the idea of hotel rewards better than a timeshare? Take a look at some of the rewards travel credit cards below to find the ideal card for your travel schedule.
FAQs
What’s the catch with timeshares?
The catch with timeshares is that unless it’s a fractional ownership structure in most cases you don’t own a piece of the underlying asset or property. Among other disadvantages, this makes them very difficult to resell.
Are timeshares evil?
No, timeshares are not evil! They can actually be valuable for getting into spots during the high season, such as Disney World and the Disney Vacation Club. That said, timeshare units are notoriously illiquid assets that often cost much more than they’re worth, so be sure to consider all the pros and cons before purchasing one.
What is the average cost of a timeshare per year?
Timeshare prices will vary significantly based on where the unit is located and how large the unit is. However, annual maintenance fees will range from $640 to $1,290.
Do you own a timeshare forever?
As long as you keep up the maintenance fees, yes, you can own the timeshare forever, unless otherwise stipulated by the timeshare contract.
Key Takeaways
- Timeshares are yearly vacations plans and packages that allow people to stay at a certain vacation home or resort for a period of time.
- Timeshares are sometimes considered bad investments because the return on your investment may be drastically lower than what you paid for it.
- Part of the downsides of timeshare ownership is they are illiquid, depreciate quickly, require maintenance fees, and can be difficult to resell.
- Instead of buying a timeshare, you can invest in a vacation home that you rent out on Airbnb. You can also apply for a hotel rewards credit card to make your vacations even cheaper.
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