Timeshares: for Real Investors or Just for Suckers?

I’m a very lucky person. I happen to be in Maui this week for a medical conference with Symposia Medicus. I’m having a great time and learning a lot. When the conference got out for the day, there was still time to hit the pool. The hotel allows us to go to the pool over on the residence side of the complex. It’s quieter and the water is heated.

My wife and I had a few drinks and we commenced to talking with the ‘locals’. The ‘locals’ at the resort are really the people who are owners. By owners, I mean they own a percentage of time of one or more units in the hotel. These can be studios up to three bedrooms. An owner is one because he or she paid a certain amount in the 10s to 100s of thousands of dollars to either the hotel chain or another owner/seller with the hotel acting as a broker. The owner then ‘owns’ one or more weeks at the resort in a year. I couldn’t help but think this wasn’t real real estate investing, but have I been missing out?

The Concept of a Timeshare

Timeshares have had a bad name but aren’t always bad. They developed as a lower-cost way for vacationers to visit places they would not have been able to otherwise. They could even ‘own’ in their desired area. Many of them didn’t want to flat-out live in their vacation area, but wanted to spend a week or more there every year as a vacation. The timeshare combined the ability to own in a desirable location at a fraction of the cost, but not have to live there and maintain the place. Instead, there would be an annual fee for this. One of the first timeshares was the former Hilton Hale Kaanapali in the 60s, just down the beach from me as I write this.

As the concept began to take off in the 70s, less scrupulous companies got into the game. They placed emphasis on sales and not as much on customer care after the purchase. Apparently some of that continues today. One of the owners complained to me about how the couch in his unit was needing to be replaced, and the hotel had recently declined to do so. They would need to replace many couches for this to happen, because his unit wasn’t just his, but 51 other owners. And, he didn’t really own a week in a unit, but a week at a certain tier of units, in a certain range of floors (higher being more desirable), with a certain view (mountain or ocean). It was easy for me to see how someone might be happy to take that spa credit and get talked in to buying from the guy at the desk in the hallway I have to walk past to get to the pool. I could also see how someone might become dissatisfied with their purchase.

Benefits of the Timeshare

I can see how the timeshare concept could be an investment. One owner told me how the value of his ‘unit’ increased fourfold from when he purchased it. Appreciation seems to exist here. An investor could feasibly purchase a share hoping for it to appreciate. During this time, that investor could enjoy the property for one week every year.

You can trade your week for a week at another property. This is a great way to see other places for something you are already paying. One owner told me she found a way to purchase a less desirable property from the same hotel chain in San Antonio and she transfers the week to Maui every year. She has never even visited the property in San Antonio!

These properties can be kept very well-maintained. You don’t have to do any work yourself.

Drawbacks of the Timeshare

The owners started talking about points and how they accrue and how they can be used. It all seemed needlessly complicated and had a little odor of complexity for the sake of confusing the owners into not fully utilizing the benefits of their purchase. I don’t have any experience with this personally, so feel free to tell me how it actually works in the comments.

These are illiquid similar to traditional real estate. With the timeshare I don’t know if you can sell it yourself or the hotel demands to be your broker. The owners told me that they will try to sell it for you for a fee.

You don’t have control of who will be managing your property. Some schemes will do the construction and turn it over to owners when they reach a certain percentage ownership over the developer. At this point, you’ll be dealing with an HOA-like structure, where you still don’t have control over the management. If you have a bad manager, that can kill your investment.

These aren’t likely to bring you any cash flow. The only benefit investment-wise is in the appreciation. One owner said there was a way to rent out your unit to others vacation-rental style. With only one week it’s not going to be great income and I’m not sure if the hotel strictly allows this.

The Verdict

For those wanting a vacation area with a relatively-little amount of down payment, a timeshare might be a way to get involved with owning a vacation property. For those craving convenience, this also might be a good option. The complexity of the points and limitations on trades combined with the difficulty in selling concerns me. For those with enough cash for a down payment on a traditional property, buying outright is hands-down the way to go. I’m able to visit my condo in Florida at any time of the year for as long as I like. For those not in a position to buy a whole property right now, I think a timeshare is a reasonable option. Do your research first, don’t just buy from the first guy with a smile at a desk in a hall who offers you a free massage.

Dr. Equity