Timeshares are a type of vacation rental typical in popular vacation destinations, like a ski resort or near Disney.
According to the American Resort Development Association (ARDA), the timeshare industry is worth $8.1 billion. What’s more, 9.9 million American households own some type of timeshare.
But what are timeshares? How do they work? And how do they stack up against traditional vacation homes?
Here’s a quick guide on timeshares to help determine if they’re the right option for you.
Key takeaways:
- Timeshares are a type of fractional vacation ownership where multiple purchasers own allotments of usage for a single property.
- There are three types of timeshares: fixed week, floating week, and a points system.
- Calculate the total cost per vacation night before purchasing your timeshare.
- Timeshares don’t offer the same return on investment as vacation home ownership.
What is a timeshare?
According to Investopedia, a timeshare “is a shared ownership model of vacation real estate in which multiple purchasers own allotments of usage, typically in one-week increments, in the same property.” It’s a type of fractional ownership for many types of vacation rental properties, including resorts, homes, condominiums, and apartments. There are even timeshares for campgrounds, recreational vehicles (RVs), and private jets.
3 types of timeshares
According to ARDA, the timeshare industry began in the 1970s as a solution for excess condominiums. Timeshares give each purchaser the right to use their shared vacation property for a period of time each year. There are three types of timeshares.
Fixed week
Fixed week timeshares are the original model for timeshares. Purchasers of a fixed week timeshare are guaranteed use of a specific property for specific dates every year. Fixed week timeshares are the least flexible model, but there’s no competition for desired vacation dates with other purchasers.
Floating week
Floating week timeshares offer a little more flexibility than fixed week timeshares. In this model, purchasers can use the timeshare for a set period of time at any point during the year. But it’s not fixed, and peak season dates are very competitive.
Points-based
Points-based timeshares are the most common type of timeshare today. It’s used by timeshare resorts like Hilton, Marriot, and Wyndham, who use points to represent timeshare ownership. The points systems are based on factors like resort location as well as the size and availability of the vacation property. The number of points an owner has are used to facilitate timeshare exchanges within their own resort system (internal exchange) or with other resorts (external exchange). The points system timeshare gives purchasers more choices in their vacation options.
2 types of timeshare ownership
Timeshares arrangements are either structured as deeded or shared leased.
Deeded timeshare
A deeded timeshare is a Right to Use Timeshare and a true fractional ownership arrangement. In a deeded timeshare contract, each purchaser owns a certain amount of the vacation property. Purchasers typically buy in for a particular place or unit for a specific number of weeks during any given year. A deeded timeshare contract also gives purchasers the right to transfer ownership by selling or gifting.
Leased ownership timeshare
A leased timeshare is not a fractional ownership model. Instead, there is a single owner of the vacation property that leases or rents out the property to those who buy into the timeshare arrangement. In other words, purchasers are simply renting the vacation home for a set period of time each year. They are not partial owners of the home.
The total cost of timeshare ownership
Are you thinking of buying a timeshare? It’s a good idea to calculate the long-term cost of the timeshare before making your purchase. Add up all the costs associated with the timeshare and divide it by the number of nights you buy. This will give you the actual cost per night.
Here’s how it works.
Let’s say you want to buy a timeshare with the following details.
Upfront cost: $15,000
Annual fees*: $1,000
Closing costs: $500
Annual vacation days: 7
Number of years*: 30
Total cost of timeshare purchase: $15,000 + $30,000 ($1,000 annual fee x 30) + $500 = $45,500
Total vacation nights: 7 x 30 = 210
Total cost per vacation night: $45,500 / 210 = $216.67
Look at the total timeshare cost. Is it something you can afford?
Compare the total cost per vacation night to your typical budget for a hotel room. A timeshare may be a good option for you if it comes in at or below that.
*Annual fees. Every timeshare comes with annual maintenance fees, or dues, in addition to the purchase price of the timeshare. These dues typically cover maintenance fees, homeowner association (HOA) fees, property taxes, property insurance, and day-to-day property management. ARDA reports that the average annual fee for timeshares in 2018 was $1,000.
*Number of years. Leased timeshares give purchasers the right to use the property for a specific week for a specific number of years. This can range from 20 to 80 years, with 30 years being the most common.
Timeshares vs. vacation rentals
Timeshares are vacation property that uses a shared or fractional ownership model. As a result, timeshare owners don’t own their vacation property. Instead, they own access to that vacation property for a set period of time every year.
Vacation rentals, or short-term rentals, are properties owned by an individual or entity to use for their vacations, rent out to others, or both.
So, what’s the better option – timeshares or vacation rentals? Both options have advantages and disadvantages. Let’s take a closer look at them.
Pros and cons of timeshare ownership
Timeshares aren’t considered an investment. And here’s why. Timeshare owners do not earn property appreciation or rental income. However, that doesn’t mean they don’t have advantages.
Pros
- They’re maintenance-free because the annual dues go toward maintaining the timeshare property.
- Timeshare units are typically large, include many amenities, and are located in or near large resort communities. As a result, they’re great for group travel.
- Owning a timeshare basically requires you to take a vacation every year, or you don’t get your money’s worth.
- Timeshares cost less than buying a vacation home.
Cons
- 85% of timeshare buyers regret their purchase. And unfortunately, there’s not a lot of demand for timeshare resales.
- Timeshare costs on the resale market are often priced 50-90% below the initial purchase price.
- In a fixed-week timeshare, access to the timeshare unit is limited to a set week every year. Competition is fierce for peak vacation dates on floating week and points timeshares.
- Purchasers must pay annual fees each year in addition to their purchase price. These fees are likely to increase over the number of years the purchaser is committed to the timeshare.
- Upselling is common in the timeshare industry, and many timeshare companies are associated with scams.
Pros and cons of vacation rental ownership
Vacation rentals are an excellent option for anyone interested in real estate investment. They have many perks and few cons.
Pros
- Vacation homes allow investors to generate passive income.
- Vacation properties appreciate, especially those in high-demand areas like Las Vegas or Orlando. The result? An amazing ROI.
- Vacation homeowners can use their properties for personal use whenever they like.
- Vacation homeowners get to enjoy many tax benefits.
Cons
- Financing a vacation home purchase can be expensive, especially given today’s interest rates.
- Vacation homeowners are responsible for all property management, maintenance costs, and upkeep.
- Likely to pay more taxes if the property is rented out for more than two weeks each year.
The bottom line
Timeshares are a way for people to own access to vacation properties. They’re cheaper to purchase and maintain than a vacation home. Still, they don’t appreciate or provide a way to earn passive income. If you’re looking to invest in real estate, a timeshare isn’t the way to go.
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The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.
