How Do Timeshares Work?

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Timeshares are a common form of vacation rental found in sought-after spots like ski resorts or near Disney. According to the American Resort Development Association (ARDA), the timeshare industry is valued at $8.1 billion, with 9.9 million American households owning some form of timeshare. But what exactly are timeshares, how do they work, and how do they compare to owning a traditional vacation home? This guide offers an overview to help you decide if timeshares are right for you. Key points to remember:

  • Timeshares represent fractional vacation ownership where multiple buyers own usage rights for a single property.
  • Three types of timeshares exist: fixed week, floating week, and points-based.
  • Before buying a timeshare, calculate the total cost per vacation night.
  • Timeshares don’t offer the same return on investment as owning a vacation home.

According to Investopedia, a timeshare is a “shared ownership model of vacation real estate where multiple buyers own usage rights, typically in one-week increments, in the same property.” This fractional ownership model applies to various types of vacation rentals, including resorts, homes, condos, apartments, and even campgrounds, RVs, and private jets.

Timeshares originated in the 1970s as a solution for surplus condominiums. Timeshare ownership grants each buyer the right to use the shared vacation property for a certain duration each year. The three types of timeshares are:

  • Fixed Week: This model guarantees buyers the right to use a specific property at the same time each year.
  • Floating Week: These timeshares offer more flexibility, allowing buyers to use the timeshare at any point during the year.
  • Points-Based: This is the most common timeshare model today, used by resort chains like Hilton, Marriott, and Wyndham. The points system is based on factors like location, property size, and availability, providing buyers with more vacation choices.

Timeshare ownership can be structured in two ways: deeded or leased.

  • Deeded Timeshare: This is a fractional ownership model where each buyer owns a fraction of the property. Buyers purchase rights to a specific place or unit for a designated number of weeks each year.
  • Leased Ownership Timeshare: This is not a fractional ownership model. Instead, a single owner possesses the vacation property and leases or rents it out to timeshare buyers, who essentially rent the vacation home for a predetermined period each year.

Before purchasing a timeshare, it’s vital to calculate the long-term expense. Take into consideration all the costs associated with the timeshare and divide it by the number of nights you’re securing to get the genuine cost per night.

For instance:

Upfront cost: $20,000

Annual fees*: $1,200

Closing costs: $700

Annual vacation days: 10

Number of years*: 35

Total cost of timeshare purchase:

$20,000 + $42,000 ($1,200 annual fee x 35) + $700 = $62,700

Total vacation nights: 10 x 35 = 350

Total cost per vacation night: $62,700 / 350 = $179.14

Compare this cost per vacation night to your regular hotel room budget to determine if it is affordable. If it’s equal to or less than your usual budget, a timeshare could be a worthwhile consideration.

*Annual fees: Every timeshare comes with annual maintenance fees or dues, apart from the purchase price. These dues generally cover maintenance, HOA fees, property tax, insurance, and day-to-day property management. ARDA reports that the average annual fee for timeshares in 2018 was $1,200.

*Number of years: Leased timeshares provide buyers with the right to use the property for a specific week for a certain number of years, typically ranging from 25 to 85 years. However, 35 years is the most common term.

Comparing Timeshares and Vacation Rentals

Choosing between timeshares and vacation rentals can be challenging when planning a vacation. Let’s explore the pros and cons of each option to help you make an informed choice.

Timeshares are affordable vacation options that offer spacious units and many amenities, making them perfect for group travel. Property maintenance is taken care of by the management company. However, it’s important to note that timeshares are not considered an investment since they do not appreciate in value or generate rental income.

Vacation rentals provide a different experience. Owning a vacation rental property allows you to generate passive income while enjoying personal use whenever you want. Vacation rentals can appreciate in value, especially in high-demand areas, providing a great return on investment. However, financing a vacation home purchase can be expensive, and you’ll be responsible for all property management and maintenance costs.

Timeshare ownership has downsides. Many buyers regret their purchase, and the resale market is often limited, with prices significantly lower than the initial purchase price. Additionally, timeshare owners are tied to a specific week or time period each year, which can be restrictive.

In contrast, vacation rentals offer more flexibility and control over your vacation plans. However, renting out your vacation property for more than two weeks a year may result in higher tax obligations.

In conclusion, if you’re looking for an affordable and hassle-free vacation option, a timeshare might be suitable for you. However, if you’re interested in real estate investment and want more flexibility and potential for income, a vacation rental could be the better choice. Ultimately, it depends on your personal preferences and financial goals.

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Please note that the information provided in this article is for general knowledge purposes only and does not constitute individual or specific security or investment advice. These perspectives may change without prior notice. Please review Foothold’s disclaimers for more information.

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