Making Arithmetic Sense Of A Timesharing Holiday

Making Arithmetic Sense Of A Timesharing Holiday

Ranbir Singh and his wife Alia, a couple in their mid-thirties, recently received a call from a timeshare company to attend their presentation. They were promised free gifts and a holiday voucher in return for their precious time and effort. Over a slide-show and talk of 60 minutes, a charming saleswoman from the company threw at them arithmetic that made them believe that this was the best bargain buy they could ever have in their life. After all, the membership would entail them to get seven days’ holiday every year for 25 years with access to a wide network of destinations across the world.

“Since your holidays are pre-booked, you save money and are protected from fluctuating hotel prices. And if you make the payment right now, you are eligible for a free Apple smart phone,” the salesperson said. It seemed to be an irresistible offer! And why not, since all of us, deep within our subconscious mind, keep thinking of taking a break from the routine of work, and more work. And of course the videos and photographs of all those amazing locations at Goa, Ooty, Dalhousie, Coorg, Jaipur, Sikkim, et al can surely take your breath away. Like Ranbir and Alia, there are many of us who have been in such a situation and have been tempted to pay up too. The question is: does it make financial sense?

What is Timesharing?
For the uninitiated, a vacation ownership or timesharing is a product sold by vacation ownership or holiday companies in which you acquire the right to use a unit of a resort for a specific period of time – mostly seven days – in a year for a specified number of years, mostly 25 years. There are more than 40timeshare companies in India and some of the well-known companies in this field are Sterling Holiday Resorts, Club Mahindra, Country Club, etc.

The Actual Arithmetic
When you opt for a timeshare, there are two types of costs involved. First is the lump sum amount that you pay to buy the ownership for a specified period. This is the hefty amount that you pay upfront or in equated monthly instalments (EMIs) of 18-24 months. This amount depends upon the type of package that you choose. Generally there are four types of packages available. For example, if you purchase a package that gives you the right to use the property during peak holiday season such as any major festival period, the winter or summer vacations, etc. then it will cost you almost twice the amount you may pay for the second best package.

The second best package allows you to go for long holidays during the peak season for a specific location. For instance, you may want to utilise the property of Goa during October to February. Next is the package that offers you less than ideal times but not completely off-season, also known as the regular season. This will cost you 60 per cent lower than the previous package. The last package, which costs the lowest, will allow you to use the vacation property during the off-season and when you are probably not interested in visiting the place.

Besides, the initial lump sum amount will also depend upon the type of room that you choose. There are different types of rooms ranging from studio apartment to double bedrooms. Hence, the upfront cost that you pay will depend upon the

What is a Timesharing Holiday?

Timeshare is typically a property in the form of a hotel or a luxury resort where multiple people hold rights to use the property. However, the number of days that they can use the property is fixed which in most of the cases is one week in a year. Major players in India offering timeshare holidays are Club Mahindra, Sterling Holiday Resorts and Country Club, among others. Here are the salient features of a timeshare holiday:


☛ A member has to bear one-time membership fee and annual maintenance charges depending on the type of package.
☛  Package depends on the type of room – studio apartment, single bedroom, double bedroom – and type of season based on occupancy of property, code-named purple, red, white or blue.
☛ Yearly maintenance called annual subscription fee (ASF) or annual maintenance charge (AMC) has to be paid by members. The annual maintenance charge depends again on the type of the package.
☛ You have to pay for food and other facilities.

season you choose and the type of room. Thus, if you have chosen to take a vacation during the peak season and opted for double bedrooms, you will have to pay the highest amount in the package. The second type of cost that you need to incur is yearly maintenance called annual subscription fee (ASF) or the annual maintenance charge (AMC). This will also depend on the type of package you choose.

Actual Costing
You will not find the actual cost easily on the website of any of these timesharing companies. However, a little bit of research after attending one of their presentations will give you some idea of the real costs involved. For example, according to the information given on the website of Club Mahindra, the membership cost ranges from Rs3,15,300 for a ‘Blue’ studio to Rs19,95,900 for a ‘Purple’ double bedroom apartment. If we take the average of these two figures it works out to Rs11.55 lakhs for a ‘Purple’ studio apartment. This membership will help you to use their studio apartment even during the peak season. For this the average AMC will be around Rs17,000 every year.

Now we will adjust the above membership fees to take into account other players who may not be charging as a market leader. Therefore, we assume Rs9 lakhs as a one-time membership fee and Rs16,000 as AMC. There are EMI options available to pay the initial AMC fees; however, they also come at a cost if your tenure is more than 18 months. So, in 25 years the total amount you will be paying is Rs13 lakhs comprising Rs9 lakhs for membership and Rs4 lakhs as AMC.

Analysis
Your annual ownership cost is the sum of the annual maintenance fee plus an opportunity cost on the money you invested in the purchase of the membership. Therefore, in thecost equates to about Rs82,418. Are you wondering about how this figure was arrived at? It’s simple: we have assumed that Rs9 lakhs is invested in a debt fund which is generating post-tax return of 6 per cent and you are withdrawing equal instalment every year for the next 25 years. The figure will work out to be Rs66,418. Add to it Rs16,000 of AMC and it comes to Rs82,418 each year.

Now, assuming that Rs82,418 gets you the right to one week a year in a timeshare resort, your accommodation costs you roughly Rs11,774 per night! Whether that’s a bargain or a bust depends on what you would pay for accommodation of similar quality in a similar location. If you check rates of five star hotels in Goa, during Christmas vacation, barring a few all hotels are available at below Rs10,000 per night and most of them include breakfast. The argument in favour of timesharing will be that hotel room rates keeps on increasing every year and that has not been part of the above analysis.

Hence, in our next set of analysis we have assumed that every year you take a week-long holiday and for the first year you pay Rs7,000 per night, which means you spend Rs49,000 every year. Assuming hotel room inflation of 5 per cent every year, you will pay Rs51,205 for seven nights the next year. Thus, in the 25th year you will pay around Rs1,41,000, which means Rs20,132 per night. Against this you have invested Rs9 lakhs earning you 6 per cent every year, which means at the end of the first year you have Rs9,54,000; add to it Rs16,000 as AMC. So at the start of the second year you have Rs9,70,000. Out of this you take Rs49,000 and let the remaining amount of Rs9,21,000 remain invested.

Next year you withdraw Rs51,205 for seven days’ vacation out of Rs9,94,237 that you have accumulated – Rs16,000 AMC + Rs9,21,000 of the earlier investment + Rs56,000 as in interest at 6 per cent. Continue this process for 25 years. At the end of the 25th year, after enjoying your vacation, you are still left with Rs5.9 lakhs. Now there are two parameters that we have kept constant in the above analysis. The first is the rate of inflation and the second is the interest rate or return generated by your initial investment. Now let’s alter that and check how things work out. We ran a simulation and found that only at higher room inflation and lower returns will you regret not buying membership of timeshare holidays.

The below graph shows that if hotel room inflation remains at 5 per cent and even if you get return of 5.5 per cent on your investment, you will still end up with Rs1.1 lakhs at the end of 25 years. Nevertheless, if hotel room inflation is 8 per cent and your investment also generated similar returns, you will have to spend Rs3.41 lakhs extra than buying timeshare membership. The above figure and analysis makes it clear that it is better not to go for timesharing membership. Besides the quantitative factors there is also the qualitative factor that must be taken into consideration. There are some other disadvantages of opting for a timesharing vacation. The biggest is that you are bound to that particular property and therefore lose flexibility.

For example, if you want to visit North Goa while your timeshare property is located in South Goa, you will end up spending a lot of time and money in commuting from one end to the other. Moreover, if you are the type who makes impromptu decisions about taking a vacation, forget about getting a room in your timeshare resort. You need to book your room at least one month advance. Moreover, if you will research more, there are various travel websites that will provide you hotels and resorts at competitive rates and discount offers. Therefore, do not fall for the charm of salespersons and be in a hurry to sign a cheque. Do some back-of-the-envelope calculations for a reality check.



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