Timeshare economics explained by an economist: does a timeshare make financial sense?

An accomplished economist’s account of a timeshare presentation in South Carolina offers a clear, numbers-led view of a question many buyers ask: does a timeshare make financial sense compared with renting?

Leading economist

Arnold Kling earned a PhD in Economics from the Massachusetts Institute of Technology before working in research for the Congressional Budget Office and the Federal Reserve Board. He later worked for many years as Chief Economist at the Federal Reserve Board.

In the private sector, Kling was recruited by US financial institution Freddie Mac (FM), where he oversaw the development of option pricing models for mortgage default risk and prepayment risk. He also pioneered research into automated underwriting, including early leadership in the use of credit scores and statistical methods for house appraisal.

Arnold Kling has published multiple scholarly books and articles on economic subjects. He is an Adjunct Scholar at the Cato Institute and is affiliated with the Mercatus Center.

It is fair to say Mr Kling is a man who ‘knows his way around numbers’.

Timeshare pitch

The Kling family attended a timeshare sales presentation at Hilton Head’s Spinnaker Resort in South Carolina. Arnold and his wife Jackie chose not to sign up and left, with the salesman’s hissed parting shot — "I don't believe you're really an economist," — ringing in their ears.

Kling recalls, with quiet amusement, that the salesman had just drawn a picture of a rubbish bin to show Arnold and Jackie — in deliberately simple terms — where their holiday rental money was supposedly “going”.

Leaving aside the awkwardness of a timeshare salesman explaining basic financial ideas to a leading economist, what exactly was Kling’s objection?

Profitability formula

"I had determined that the deal was a loser," says Arnold, "based on (the salesman's) figures and an economic formula for the profitability of buying vs. renting."

Arnold’s formula? Profitability = Rental rate + Appreciation rate - Interest cost

"When profitability is positive," explains the economist, "you should buy. When it is negative, you are better off renting."

For a week’s holiday, most people rent accommodation. If you spend a lot of time in one location, you might buy a flat or apartment there. With a timeshare, you do neither in the usual sense: you pay for a membership that provides one week of accommodation each year.

But isn’t buying always better than renting?

Arnold says no. "If you have to pay $500,000 to buy something, and you could rent it for a nickel a year, would you still buy it? No. In fact, the decision to rent or buy depends on prices, rents, and other factors that go into the profitability formula."

Renting vs owning

Owning something usually comes with the advantage of retaining value when you stop using it — leading to a net gain. Right?

"The value of a piece of property will depend on the rate at which the price appreciates," says Arnold. "That is why the appreciation rate is in the formula.

"When you own the place where you are staying, you do not have to pay rent. Therefore, you can add in the rental rate (the ratio of the rent to the purchase price) to the profitability calculation."

Buying anything also has a drawback: you either tie up cash or borrow it. That is why the interest cost matters in the calculation.

The salesman’s figures used in Arnold Kling’s formula

• For the rental rate: the Kling family’s holiday rent was $1,200 for the week. The timeshare cost was approximately $12,000 ($11,900). On the face of it, that looks like a 10% rental rate — which seems attractive at first glance.
• However, Arnold then adjusts the calculation for fees. The timeshare maintenance fee was $433.25 per year, plus a membership fee of $200 per year, a publication subscription fee of $67 per year, and a further ‘processing fee’ of $93 per year.
• The fees added up to $793. So, instead of saving $1,200 in rent each year, the net saving was $1,200 - $793 = $407.
• Dividing $407 by the timeshare price of $11,900 produces a 3.4% rental rate — the first figure needed for the formula.
• In the pitch, the salesman used the standard timeshare assumption that rents and prices rise by 10% per year. Kling (generously) used that as the appreciation rate.
• The quoted financing rate was 17.9%, so that was used as the interest cost.

When these figures are entered into the formula, the result is:

Profitability: 3.4 + 10.0 - 17.9 = minus 4.5%

The negative figure means buying this timeshare would cost 4.5% more per year than renting, based on the inputs used.

"To illustrate the economic value of this timeshare, you should draw an even bigger trash can," Arnold noted dourly.

A second illustration

Arnold also couldn’t resist totalling the price of all 52 weeks to compare it with the underlying value of the apartment.

"The total price for all the weeks came to about $600,000. My guess is that the condo did not cost more than $200,000. And on top of that $400,000 in profit for the timeshare company come all those lovely annual fees.

"I don't want to generalize and say that all timeshare salesman are sleazebags, only the ones that I've met. Nor do I mean to criticize people who buy timeshares. I'm sure there are some happy owners. However, the economics are very unfavorable for the buyer."

Industry expert’s advice

"The people who benefit from timeshares are not the customers," agrees Andrew Cooper, CEO of European Consumer Claims. "The only winners in a timeshare sale are the resort owners and the sales team."

Any timeshare owners who no longer feel their membership offers value — or who believe they were mis-sold — should get in touch with our team at the Timeshare Advice Centre for advice on their options.