This post is was originally published on Investor Junkie

My wife and I went on vacation to Disney World a couple of years ago. The family had a great time, and I personally was glad to get away from business. We stayed at my parents’ Orange Lake Resort timeshare, which is just outside the park.

Even though they’ve owned the timeshare for more than 10 years, this was the first time I had gone there. The resort itself is very nice, has all of the amenities and is in a great location. However, I have always thought that my parents’ purchase was a bad decision. After all, they paid $10,000 for it, and today the maintenance is $750 per year.

My question is: Wouldn’t it be cheaper just to stay at a hotel or to rent a unit in the resort for that week? The answer, unfortunately, is yes.

How Timeshares Work

Timeshares are vacation plans that have been around in the U.S. since 1969. Today, it’s a $9.2 billion industry, according to the American Resort Development Association (ARDA). That’s actually quite sizable when compared to the nearly $8 billion music industry or Major League Baseball’s $9 billion in annual revenue. In 2016, there were 1,558 timeshare resorts just in the U.S., with an average of 132 units per resort.

A timeshare gives you a partial ownership in a vacation property. You can even think of it as owning shares of stock in the vacation rental. You pay an upfront price to purchase your unit and then an annual maintenance fee. This gives you access to the property for a certain period of time, which is usually the same time slot each year. When you are not using the timeshare, others with a similar interest are.

The average sales price for a one-week timeshare today is approximately $20,940, with an average annual maintenance fee of $880, according to the ARDA. Most timeshare agreements are indefinite contracts, meaning that you’re obligated to pay the maintenance fee indefinitely, which is a big financial commitment.

If you want to use your unit on another week, you must “bank” your week and exchange it for another time or location. In the sales pitch (I had the misfortune of attending one), the resort mentioned it’s no longer doing week-based timeshares. It’s now a points-based system. You get X number of points per year when you buy a unit and can then use it any way you choose.

The points could be used for many other things: to purchase airfare, go to another location or upgrade to a bigger unit. Heck, like airline miles and credit card points, you can use your points in stores like Best Buy and Bed Bath & Beyond. Great — I can buy that toilet seat cover instead of going on vacation. I’m sure that, just as with credit card points, you are getting a fair exchange of points into dollars.

As if you can’t tell, I’m being sarcastic.

I didn’t run the numbers, but I’m sure the conversion rates are awful. So in the end, they’re making even a single week in a timeshare much more abstract to own than a hard asset. High-pressure sales guy, please remind me again, what’s the purpose of owning a timeshare?

The Missing Investment Component

It’s been said in poker that if you can’t spot the patsy, it’s you. This applies to purchasing a timeshare. The ones benefiting from the transaction are the sales person and the owners of the resort. You, unfortunately, are stuck with a small slice of a unit that has little or no resale value.

Here are the issues with owning a timeshare:

  • There is a huge resale market. Often you can pick up units for less than half of what was originally paid.
  • Like a car, a timeshare depreciates once you “drive it off the lot” (take ownership).
  • It’s rare that a timeshare increases in value. In fact, expect it to lose value, as the total cost of your ownership was marked up to cover sales presentations, incentives and giveaways.
  • Timeshares are usually sold to you when you’re on vacation and your defenses are down.
  • Most have high yearly maintenance fees. In my parents’ case, their fees are increasing every year, faster than the rate of inflation. For the amount that you pay in maintenance fees alone (forget about the initial “investment”), you could stay at a decent-quality hotel for a week.

Despite these drawbacks, the industry continues to attract new owners. In 2015, 46% of timeshare sales were from new owners, reversing a previous trend of increasing reliance on existing owners.

Timeshares Don’t Generate Income

In theory, when you buy a timeshare, you have a fractional interest in the property the rental is situated on. But it’s important to understand that this does not give you all the advantages that owning real estate normally has.

For starters, you have an interest in the same unit as other people who participate in the timeshare. Your interest, therefore, is not a standalone ownership. You are not free to do with the unit as you please.

For example, there are strict limits on the time during which you have physical occupancy of the unit. Unlike a true vacation home, you’re not able to rent it out during the rest of the year when you’re not occupying it for personal use.

We can think of a timeshare as having a partial ownership interest in a single vacation property or unit. It’s nothing like owning a vacation property outright, with the benefits that come as a result of having it.

According to the ARDA, timeshare owners are trending to be younger and more ethnically diverse than when the industry started and targeted an elderly crowd. The median age of recent buyers is 39, and 34% of owners are either Asian-American or African-American. Nearly two-thirds have college degrees. Their median income is $81,311.

However, it seems to me that the timeshare market targets the financially inexperienced. Sadly, timeshares tend to become vacation properties for people who can’t afford vacation properties. The sales materials are made to appear more about the bling and “living the good life” than about the investment return. That’s because there is no return.

If you are spending money for the future, it should be considered an investment. If it’s not generating income, it’s an expense — plain and simple. You may get enjoyment out of it, but it’s still not an investment.

Timeshares Aren’t Very Liquid

It’s usually only after you’ve purchased a timeshare that you realize there are more people looking to sell them than buy them. The likelihood of recovering your initial investment is very low — to say nothing of recovering many years’ worth of maintenance fees.

There are websites that timeshare owners can use to try to sell their property, such as RedWeek, but they charge a listing fee and an annual membership fee to use the site — and there’s no guarantee the timeshare will sell.

And there’s a substantial amount of fraud in the reselling industry. Scammers prey on timeshare owners by promising to sell the property for you — for an upfront fee — and once you pay the fee, you never hear from them again.

If you’re able to sell the timeshare (and that is never certain), you probably will get only a fraction of what you paid for it. There are two fundamental problems when it comes to selling them:

  1. More are being built/offered all the time, flooding the market, and
  2. Existing owners are selling them to get out of debt or once they realize that it isn’t the deal they thought it was when they bought in.

If you still think buying a timeshare is a good idea, and you want to avoid paying more than you will ever sell it for, buy one on the secondary market. There are many websites where you can buy a used timeshare.

Timeshare companies know that you can likely find cheaper options from existing buyers on websites such as Timeshare Users Group and RedWeek. So the companies usually offer closing incentives and other perks. But those perks don’t usually recoup the money you would save from buying from an existing owner.

The Better Alternative to a Timeshare

In my opinion, you’re better off staying at a local hotel than buying into a timeshare. Take my parents’ timeshare as an example. They paid $10,000 for the initial purchase, and if you add the $750-per-year maintenance fee paid over a 10-year timeframe, there is a total investment of $17,500 in that timeshare.

Over the last 10 years, their timeshare provided a stay of one week each year — seven days and six nights — for a total of 60 nights, which averages out to $291 per night to vacation in the same unit each year. If you were to rent a decent quality hotel room at about $175 per night, the total price paid for the timeshare would buy you 100 nights of hotel stays. Not only does it cost less per night to stay in a hotel, you would also be able to add variety to your vacation by staying at hotels located in different destinations.

And you would also be able to take advantage of frequent user rewards programs and other discount pricing being offered by the hotels. Chances are you’d get a whole lot more than 100 nights of hotel stays.

Best of all, you’d have sunk no capital in the timeshare, and the money to pay for the timeshare could be invested to earn a return on your investment. At a conservative 5% return compounded annually (starting with $10,000 and adding $750 per year), you’d be sitting on more than $26,000 right now. That’s a much better deal from where I sit.

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